Sometimes I hear an investment adage repeated frequently enough that it inspires me to go look for its origin. This year the phrase that caught my attention was “climbing a wall of worry”. This expression describes a market in which stock prices move higher against a backdrop of significant investor concerns or economic challenges. The American financier Bernard Baruch used the term in the 1930s, but it only caught on in the realm of investor jargon in the 1950s. Incidentally, you may have heard the old story of an investor who sold his stock portfolio before the 1929 crash because his shoe shiner was doling out stock tips. That investor was Baruch.
Last year the US stock market did not start out by “climbing”. Concerns over President Trump’s tariff plan caused US stocks to decline by more than 15 percent through the early part of April. Since then, market prices moved gradually higher. Notwithstanding the geopolitical headwinds and economic uncertainty, US stocks returned approximately 18 percent for the year.
Other asset classes contributed positively to last year’s portfolio performance. Bonds and real estate securities chipped in mid-to-high single digit returns while insurance-linked securities recorded their third straight 20 percent-plus annual gain. However, the star of the show was non-US stocks with a return of over 33 percent.
Cracks in the Foundation?
Can stocks keep climbing this wall of worry? Can this rally continue in 2026? We hear questions like these regularly, even if phrased differently. We do not believe that making consistently accurate short-term market forecasts is possible, but we do think that exploring these questions may nevertheless be worthwhile. Posing the questions implies some degree of skepticism. The last three years of stock returns have been very good. But what are driving the returns and are those forces sustainable?
Increasingly, the US market has become dominated by large technology companies. At year-end, only two of the top 10 companies in the U.S. market are not technology companies (Tesla and Berkshire Hathaway)[1]. The other eight make up more than one-third of the total market value of the stocks comprising the S&P 500, a proxy for the US market. These technology companies have performed very well lately, but the current degree of market concentration is out of the ordinary.
Compare today’s market composition to the list of the largest companies two decades ago. Here are the top 10 from 2005: General Electric, ExxonMobil, Citi, Microsoft, Procter & Gamble, Bank of America, Johnson & Johnson, AIG, Pfizer, and Philip Morris. The list contains financial services, pharmaceuticals, consumer goods, industrials, technology, and energy. This group seemed more representative of the broader US economy at that time.
And there’s anothor way in which the market seems out of step with the economy. Consider the following contrast…
The University of Michigan conducts a monthly survey of consumer sentiment, which tracks household views on personal finances, business conditions, and buying conditions. The November report showed consumer sentiment nearing all-time lows. Even lower than during the financial crisis of 2008 and the inflationary period of the late 70s!
Meanwhile, Wall Street analysts are uniformly optimistic about the year ahead. Each year around this time, Bloomberg News publishes a survey of analyst forecasts. For 2026, all 21 of the survey participants expect positive US stock market returns. Reasons for the optimism include double-digit percent earnings growth expectations as well as potential further interest rate cuts from the Federal Reserve. Earnings growth refers to an increase in corporate profitability whereas interest rate reductions are typically stimulative to the economy.
The average consumer is hurting while the market climbs ever higher. Perhaps that divergence can persist, but it does not seem to be sustainable forever.
The disconnects between the capital market and the economy, plus the increasingly top-heavy nature of the US market, connote a certain fragility. Fortunately, we have an excellent tool at our disposal for dealing with this fragility. That tool is diversification—both within asset classes and across asset classes. We can reduce exposure to concentrated parts of the US market and simultaneously reduce our reliance on the US market overall.
Your portfolio draws resiliency from multiple asset classes, each exposed to different risk factors and delivering a somewhat different pattern of return. Different asset classes take turns as the best performer. Last year, it was non-US stocks, which held up particularly well as US stock prices declined before rebounding. Diversification provides resiliency that does not require a crystal ball, only patience. This year will bring new surprises. Your investment strategy is ready for them.
We look forward to the year ahead and the opportunity to serve you. As always, we thank you for your trust and confidence.
[1] Alphabet Inc. Class A and Class C are counted separately. One might debate whether Tesla is more a technology company than an automobile manufacturer.
