December 2025 Client Letter
Recently, as I sat in my office, it occurred to me this was the first time in roughly two decades when I didn’t make it back to Rhode Island during the summer—and the first in which I didn’t take a single flight. A few factors contributed, but the primary reason was the unusually large number of meaningful market and policy developments throughout the year. Coupled with April’s stock market volatility, it was a demanding period, and whenever I considered stepping away, something important seemed to be unfolding.
2025 was memorable. It wasn’t calm or predictable, but it was certainly active. We spent much of the year navigating confusion around tariffs, which for many investors became a major disruptor. The range of predictions surrounding their economic impact was wide, and April alone brought headlines warning of everything from earnings slowdowns to potential recession. At the same time, there were open questions about the tax bill, ongoing speculation about when the Federal Reserve might cut interest rates, and concerns about whether corporate profitability could hold up through all the noise.
Yet despite the early uncertainty, markets moved higher, AI optimism accelerated, and many companies continued to execute well. If anything, the year reinforced two familiar takeaways. Headlines don’t always unfold into the dramatic outcomes they seem to foreshadow in real time. And market declines are part of the normal rhythm of investing.
Understanding Market Volatility
For investors, it’s helpful to remember that market declines are not an exception. To put this in context, let’s look at how often the S&P 500 typically experiences drawdowns of various sizes.
The market’s path upward has never been a straight line. Even in strong years like 2025, the S&P 500 experienced plenty of pullbacks. The index reached new highs 36 times this year but also logged 27 trading days with declines of -1% or worse. These figures are broadly consistent with long-term averages.
Since 1928, the S&P 500 has averaged about 29 days per year with losses greater than -1, and roughly 45% of all trading days over that period have been down days.
Single-day drops are common, and from time to time those daily declines accumulate into larger moves. Since 1928, investors have lived through roughly 35 market corrections (declines of 10% or more) and 22 bear markets (declines of 20% or more), including several in just the past two decades. Yet through all those episodes, long-term market progress continued.
History shows that volatility is not unusual. It is the cost of long-term returns.
Warren Buffett has a way of simplifying complex market behavior better than almost anyone. When asked whether investors should worry about corrections, he offered a perspective that still applies today:
“If you worry about corrections, you shouldn’t own stocks… The point is to buy something that you like at a price you like and then hold it for 20 years.”
Buffett’s broader message is clear. Meaningful investing requires a tolerance for temporary discomfort.
When Clients Ask About an “AI Bubble”
Several clients have expressed concerns about a potential “AI bubble.” It’s a fair question, given the speed at which AI-related companies have grown and the amount of capital flowing into the theme.
It’s important to emphasize that being thoughtful about portfolio concentration does not mean avoiding what I believe are exceptional businesses. Many leading AI companies generate meaningful earnings and serve expanding end-markets. They continue to drive a major technological transformation. Such strength does not eliminate volatility, but it does help differentiate today from earlier periods when enthusiasm ran ahead of business fundamentals.
At the same time, prudent portfolio construction often means not relying too heavily on any single sector, no matter how promising it appears. We look to balance our technology and AI exposure with areas that tend to behave differently when growth stocks face turbulence. Examples include:
• consumer staples such as Costco, Kroger, Coca-Cola, and Walmart
• healthcare companies like Eli Lilly, Johnson & Johnson, and AbbVie
• utilities including Southern Company, Duke Energy, and NextEra
These companies generate cash flows influenced by different economic drivers than major AI-related firms and have historically helped moderate portfolio volatility when higher-valuation sectors come under pressure.
The goal is not to abandon AI exposure. Rather, it is to ensure that no single trend, regardless of its potential, dominates portfolio outcomes. Balanced diversification should allow investors to participate in innovation while maintaining stability across a range of market environments.
Investing in 2026: Key Themes
1. Earnings Still Drive Markets
As we look ahead to 2026, it’s worth reinforcing a simple and important principle. Over time, earnings, not headlines, drive stock prices. Even with the attention surrounding tariffs, inflation, interest-rate debates, and shifting political narratives, corporate profitability remains the foundation of long-term market value.
Companies with durable cash flows, pricing power, recurring revenue, and strong balance sheets continue to anchor our investment approach. In 2025, despite the shifting headlines, earnings broadly held up. And that mattered more than any single news item. We expect the same dynamic next year. Fundamentally strong businesses should continue to lead.
2. AI is Also an Industrial Story
When most people hear the term physical AI, they think of autonomous systems such as robots, drones, and self-driving vehicles that operate by sensing, reasoning, and acting in the physical world. This branch of AI is already reshaping logistics, manufacturing, transportation, and service industries.
But there is a second dimension that is now receiving significant attention: the infrastructure required to make all of this possible. Behind every autonomous robot or vehicle is a tremendous amount of computing power and data flow—and that energy must come from somewhere.
Developing and deploying AI at scale requires an extensive buildout of real-world infrastructure, including:
• power generation and transmission
• data center capacity with cooling systems
• specialized industrial equipment and construction services
Demand for this infrastructure continues to grow as AI models become more computationally intensive. Each new generation of models requires more processing power, and physical AI systems including robots, drones, and autonomous vehicles layer additional demand on top.
In that sense, AI is both a digital and industrial revolution. The software advances quickly, but it depends on a foundation of engineering and construction. Companies tied to data-center development, chip production, and industrial services may benefit for years as AI adoption accelerates.
AI is not only a software breakthrough; it is a hardware and infrastructure story as well. That remains an important part of our investment focus heading into 2026 and beyond. The long-term winners may not only be the companies creating AI models but also the businesses building the physical world required to run them.
3. The Energy System Becomes the New Bottleneck
As AI adoption accelerates and the economy becomes more electrified, the U.S. energy system is facing pressures that were not widely appreciated even a few years ago. AI growth, manufacturing reshoring, electric transportation, and continued economic expansion are bringing a major issue into focus. The country faces real constraints in power generation, transmission capacity, and grid infrastructure.
Forecasts across the utility industry point to a meaningful rise in electricity demand, driven by developments such as:
• AI data centers
• industrial activity returning to the U.S.
• electric vehicles and charging networks
• semiconductor fabrication and other energy-intensive facilities
These needs are often concentrated in regions where grid capacity is already limited, increasing the urgency for additional infrastructure. Utilities, natural-gas producers, grid engineers, and renewable-power developers all stand to play a role in addressing these constraints. Companies able to expand capacity, enhance reliability, or deliver power more efficiently may see long-term tailwinds.
This theme is not about predicting shortages or crises. It reflects a structural reality. The grid must expand and modernize to support a more digital and electrified economy. As this buildout continues, the businesses enabling it may benefit in the years ahead. In many ways, the energy system is becoming the new bottleneck and an emerging investment opportunity.
Balance Remains a Reliable Guide for Investors
Across all of these themes, one message remains constant: diversification is one of the most practical ways to manage volatility and risk while still participating in long-term growth. The themes discussed above share an important point. Markets evolve, leadership shifts, and no single trend works in every environment.
AI will continue to be an important part of the market, but it should not be the only part of a portfolio. Our approach includes diversification not only across equity sectors but also across:
• cash via money-market funds
• corporate bonds, Treasuries, and other fixed-income
• precious metals through gold and silver ETFs
• defensive, dividend-oriented companies
• growth leaders benefiting from long-term innovation
The goal is not to avoid volatility. It is to manage it thoughtfully. By combining innovative areas such as AI with durable, income-producing, and defensive assets, we aim to support a steadier and more balanced investment experience over time.
As always, we’re here to help you navigate what’s next. If your financial situation has changed—or if you have questions about your investment portfolio—please don’t hesitate to call us at (800) 843-7273.
Enjoy your holidays and Happy New Year!
Matthew A. Young
President and Chief Executive Officer
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