Executive Summary
As we close 2025 and look ahead to 2026, financial markets continue to be supported by earnings growth and sustained investment in productivity-enhancing technologies, including artificial intelligence. At the same time, longer-term investment outcomes are increasingly influenced by elevated equity valuations, persistent inflation dynamics, and rising global debt levels. While near-term equity performance may remain constructive, history suggests that starting valuations, interest rates, and currency dynamics play a decisive role in shaping returns over the next seven to ten years.
Against this backdrop, investors face an important trade-off. A central question we believe investors should consider is not simply how much return is possible, but how much risk they are willing—and able—to bear in pursuit of that return. For example, would an investor be more dissatisfied experiencing a modestly lower return in a strong equity market, or experiencing significant losses during a market decline? The answer to that question is highly personal, but it is fundamental to sound portfolio construction.
Our role as your fiduciary is not to predict short-term market outcomes, but to position portfolios prudently across a full market cycle—participating in upside while mitigating the risk of permanent capital impairment
To that end, our core portfolios are intentionally structured to participate in market advances while seeking to mitigate downside risk through broad diversification, inflation-aware positioning, and meaningful allocations to high-quality fixed income and liquidity. This approach is designed to support long-term financial objectives across a range of market environments rather than rely on any single economic or market outcome.
This letter summarizes how we view the near-term environment, the longer-term return landscape, and why your portfolio is intentionally structured as it is.
As we look ahead to 2026, we do so with both optimism and humility, mindful that markets and life alike are rarely linear.
Warmest regards,
Lee E. Kerr
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The Near-Term Landscape: Why 2026 Could Remain Constructive
Entering 2026, the prevailing consensus among many large investment firms is cautiously optimistic. Earnings expectations remain positive, financial conditions are less restrictive than in prior years, and substantial capital continues to be directed toward productivity-enhancing technologies, particularly artificial intelligence. These forces can support equity markets, sometimes for longer than valuation-based models alone might suggest.
It is important to acknowledge this reality. Markets do not require an immediate recession or economic slowdown to remain elevated, and elevated valuations can persist for extended periods. As investors, we must respect the market we are in rather than anchor solely to what “should” happen.
However, short-term optimism does not eliminate longer-term constraints. In fact, periods of strong returns often shape the opportunity set—and risks—of the years that follow.
Valuations and Long-Run Gravity: What History Suggests
Looking beyond any single year, long-term investment returns are heavily influenced by starting valuations. On this front, several widely followed valuation measures are at or near historically elevated levels.
· The Shiller CAPE ratio, which smooths earnings over a full business cycle, remains near the upper end of its historical range.
· The Buffett Indicator—market capitalization relative to economic output—also sits near historical extremes, signaling that equity prices are large relative to the size of the underlying economy.
Historically, periods that began with valuation levels similar to today tended to produce more modest and more volatile returns over the following decade, regardless of whether markets continued to rise in the near term. These measures do not predict timing, but they do inform expectations.
Some valuation-anchored frameworks, such as those articulated by John Hussman, emphasize this long-run arithmetic even more strongly. While we do not adopt any single model wholesale—and we do not rely on precise forecasts—the central insight is widely shared: when prices are high relative to sustainable cash flows, long-term returns tend to be constrained, and downside risk becomes asymmetric.
This perspective aligns with long-term capital market assumptions published by several major investment firms, which now project muted equity returns over the next 7–10 years even as they acknowledge the possibility of continued near-term strength.
A Currency and Purchasing-Power Lens: Lessons from 2025
One of the most insightful perspectives on 2025 came from Ray Dalio, who argued that the year’s most important story was not simply U.S. equity performance, but what happened to the value of money itself. Measured in U.S. dollars, equity markets delivered solid returns. Measured against stronger currencies—or against gold—those same returns looked far less impressive.
This distinction matters. When a currency weakens, assets priced in that currency can appear to rise even if their real purchasing power is unchanged or declining. Over long periods, this effect meaningfully influences wealth, consumption, and portfolio outcomes.
Dalio’s broader point was not that equities are inherently flawed, but that currency and purchasing power are integral components of investment returns, not background noise. This lens helps explain why international markets and hard assets outperformed U.S. equities in 2025, and why diversification across currencies and asset types remains essential.
Inflation, Debt Growth, and Dollar Debasement
Another defining feature of the coming decade is the interaction between inflation, debt growth, and monetary policy.
Inflation is not merely a short-term price phenomenon; it reflects changes in the value of money itself. Persistent fiscal deficits, accommodative monetary policy, and rising debt burdens can erode purchasing power over time, even if headline inflation fluctuates.
Several structural forces are contributing to this environment:
· U.S. fiscal dynamics, including sustained deficits and large volumes of debt that must be refinanced.
· Rising global defense spending, as geopolitical tensions prompt many nations to increase military budgets, often funded through borrowing.
· A historically large private-sector capital expenditure cycle, particularly related to AI infrastructure, energy usage, and data capacity.
Together, these forces increase the supply of debt securities and intensify the competition for capital. In such environments, investors may demand higher compensation for lending over long horizons, which can keep interest rates higher than many expect and reduce the effectiveness of policy easing.
This matters for both stocks and bonds. Higher discount rates can weigh on equity valuations, while debt assets—promises to deliver money in the future—can lose real value if purchasing power is eroded.
What This Means for Portfolio Construction
Against this backdrop, we believe prudent portfolio management requires balance rather than binary positioning. We do not assume uninterrupted upside, nor do we position portfolios for a single adverse outcome.
Your portfolio is structured around our Crosswalk Moderate Allocation Model, designed deliberately to balance participation and protection in an environment of elevated valuations, inflation uncertainty, and growing debt supply.
Each component of the allocation serves a distinct role:
· U.S. Equities (30%) This sleeve is designed to participate in domestic economic growth, innovation, and corporate profitability, while avoiding over-reliance on valuation expansion. Our focus within U.S. equities emphasizes companies with durable business models, strong balance sheets, and the ability to generate sustainable cash flows across economic cycles. While technology and productivity gains remain important contributors to long-term growth, we are mindful that elevated valuations can amplify downside risk when expectations are not met. Accordingly, this allocation seeks exposure to growth while maintaining discipline around quality, diversification, and risk.
· International Equities (10%) International equities play a complementary role by diversifying sources of return across different economic regimes, valuation environments, and currencies. Market leadership rotates over time, and periods of U.S. outperformance have historically been followed by periods where non-U.S. markets contributed meaningfully to returns. This sleeve also serves as a partial hedge against currency concentration risk, recognizing that changes in the value of the U.S. dollar can materially affect long-term purchasing power and real returns.
· Hard Assets (10%) The hard-asset allocation is intended to help preserve purchasing power in environments where inflation, fiscal expansion, or monetary policy reduce the real value of financial claims. This includes exposure to real assets and precious metals, which historically have exhibited different performance characteristics than traditional stocks and bonds. This sleeve is not designed to generate short-term income, but to act as a portfolio stabilizer in periods where confidence in fiat currencies, real interest rates, or financial assets is under pressure.
· Fixed Income and Cash (50%) The fixed-income and cash sleeve serves as the structural anchor of the portfolio. Within this allocation, we emphasize high-quality bonds with relatively shorter durations, often held to maturity, to reduce sensitivity to interest-rate volatility and to provide predictable
cash flows. We also maintain a dedicated allocation to individual Treasury Inflation-Protected Securities (TIPS) to help preserve real purchasing power in inflationary environments. In addition, we hold a measured exposure to select foreign and emerging-market sovereign debt to enhance diversification and income potential while managing overall risk. Cash and cash-equivalents are held intentionally—not as market-timing tools—but as sources of liquidity and optionality, allowing disciplined rebalancing and opportunistic deployment of capital during periods of market stress or improved valuations.
This structure is intentional. Equity exposure allows participation if markets continue to advance. At the same time, the combination of high-quality fixed income, inflation protection, real assets, and liquidity is designed to mitigate the impact of severe drawdowns and preserve capital during periods of volatility.
Importantly, this allocation is not predicated on a single forecast. It is designed to remain resilient across a wide range of outcomes—supporting long-term compounding while reducing reliance on continued valuation expansion.
Our Discipline Going Forward
We will continue to monitor:
· Inflation trends and purchasing-power dynamics
· Interest rates, yield curves, and debt issuance
· Corporate earnings, margins, and capital investment
· Market valuations and risk premiums
We do not believe successful long-term investing requires predicting the next correction or the next rally. It requires discipline, diversification, and a portfolio designed to withstand a wide range of outcomes.
Our objective remains unchanged: to help you stay invested through both opportunity and uncertainty, compound wealth responsibly, and reduce the risk of permanent capital loss.