By Thierry Hasse, Chief Investment Officer
Elevage Partners | January 2026
The S&P 500 is about to deliver its third consecutive year of returns above 15% — a feat that’s happened only four times since 1957 (Source: S&P Global). The last time we saw such strong returns was 2019-2021. But let’s not forget what followed: the Fed’s sharp tightening in 2022 that triggered a bear market, with the S&P tumbling 19%.
As we enter 2026, the question on many investors’ minds is this: Can the good times continue, or should we brace for a setback?
The Fed’s High-Wire Act
The Federal Reserve faces a difficult situation — its dual mandates of price stability and maximum employment are pulling in opposite directions. After cutting rates in December, officials see potential for additional cuts if inflation continues moderating. The latest Consumer Price Index reading of 2.7% is encouraging (Source: Bureau of Labor Statistics). But labor market weakness — modest payroll growth, drifting unemployment, significant layoffs — suggests downturn risk.
Imagine Powell performing a high-wire act with the economy’s fate in his hands. Ease too quickly and risk reigniting inflation. Keep rates too high and the labor market deteriorates sharply. The 10-year Treasury yield remains our canary in the coal mine.
Strong Earnings, But Extreme Concentration
Wall Street expects earnings growth of 13% to 15% for 2026 — well above the historical 7% average (Source: S&P Global). Not a single top strategist surveyed by Bloomberg predicts a decline; the median forecast is another 10% gain (Source: Bloomberg News).
That unanimity is flashing a warning light. The 10 biggest stocks make up 41% of the S&P 500’s market cap. Corporate capital spending growth is essentially all geared toward artificial intelligence — data centers, software and processing equipment (Source: Apollo). Investing in the S&P 500 today means betting heavily on continued AI adoption.
Many complain about this concentration. Maybe they should have spent more time finding reasons to own these companies. We’ve maintained long-term positions in the highest-quality technology companies while managing valuation risk actively.
We exited semiconductors in the the fourth quarter. They were trading at 50 times earnings — triple their historical 15 to 20 times average. At that valuation, even good news disappoints.
We shifted AI exposure to Microsoft, Google and Amazon. These companies profit from AI through cloud services, without the massive capital costs of chip manufacturing. They trade at 30 to 35 times earnings — still elevated, but more defensible given their pricing power and sticky customers. This is valuation discipline, not a bet against technology’s future.
Three Forces Shaping Our Positioning
Beyond Fed policy and earnings dynamics, three trends shape our thinking:
- AI is moving from euphoria to reality: Companies have invested $1.7 trillion in AI infrastructure. In 2026, investors will start measuring actual returns rather than assuming unlimited potential. This shift from promise to proof will separate companies that can deliver from those that can’t. We’re positioned in companies that profit from AI without the capital intensity — a more durable business model as the technology matures.
- Government spending is increasing in durable ways: Defense spending is up $119 billion this fiscal year with multi-year contracts already locked in. Tax cuts are secured through 2035. This is real money flowing into the economy over multiple years, not temporary stimulus. We’re evaluating selective exposure to defense contractors with enormous backlogs — the question we’re wrestling with is whether these mature, dividend-paying businesses fit our quality mandate or represent a departure from our core philosophy.
- Wealth concentration creates persistent structural demand: The wealthiest 10% of Americans now control roughly 75% of all financial assets (Source: Federal Reserve). This isn’t a moral judgment—it’s a market reality that explains much of our positioning.
Companies serving affluent customers and corporate enterprises — whether that’s enterprise software, premium retail or wealth management — tend to have stable revenue even when the broader economy slows. Their customers keep spending through cycles. This trend has been developing for decades and shows no signs of reversing. It’s why we maintain significant positions in businesses with pricing power serving this demographic.
The Trade-offs We’re Making
Here’s what we’re optimizing for: We’re willing to give up performance in extreme bull markets to protect capital in bear markets.
We don’t try to maximize returns in every market environment. When markets rally sharply, we’ll participate but likely trail investors concentrated in the highest momentum stocks. Our focus is on limiting losses when markets decline — that capital preservation matters enormously for long-term compounding.
This asymmetry — capturing reasonable upside while protecting capital in downturns — is what we’re building for. It’s boring by design. And boring compounds wealth.
What You’ll Find (And Won’t Find)
Typical client portfolios invest in high-quality companies across sectors: strong balance sheets, dominant positions, growing earnings over time. What you won’t find: speculative plays, meme stocks or the latest fad.
Fixed income has short duration — two years versus the market’s five years — given fiscal concerns and large budget deficits ahead. If yields move past 5%, we’d reconsider long-maturity bonds. Until then, we find better risk-adjusted returns in mortgage-backed securities, structured products and high-yield bonds.
The Bottom Line
I’m optimistic about 2026, but that optimism is tempered by vigilance. We’re positioned in high quality companies that we think can perform across different environments — not because we know the future, but because we’ve built typical client portfolios that work in multiple scenarios.
We continue monitoring markets daily and questioning what can go wrong to prepare for most outcomes.
Questions? Don’t hesitate to reach out.
Thierry Hasse is Chief Investment Officer at Elevage Partners, where he oversees investment strategy and portfolio management.