Reading the cycle: why we're cautiously constructive heading into 2026

Where we sit

Twenty-plus years of institutional portfolio work has taught me that the most dangerous moments in a cycle are not the ones that feel obviously dangerous. The dangerous moments are the ones that feel comfortably ambiguous — where the data points cut both ways, the consensus is murky, and reasonable practitioners can argue either side without sounding foolish. We are in one of those moments.

On the constructive side: corporate earnings have held up better than feared, household balance sheets remain healthier than in any pre-recession period in modern memory, and the labor market — while cooling — has not broken. On the cautionary side: valuations on the largest index components remain elevated by most historical measures, fiscal policy is procyclical at a moment when monetary policy is still restrictive, and the concentration of returns in a small number of names creates a structural fragility that doesn't show up in headline volatility.

What history actually tells us

The temptation in any cycle is to anchor to the most recent analog. In 2024 it was the late 1990s. In 2022 it was the early 1970s. Both analogies contained useful information and both, taken literally, would have led to poor portfolio decisions. The discipline we try to bring is to treat historical comparisons as inputs to a probabilistic framework rather than as scripts to follow.

Here is what we think the weight of historical evidence actually says: late-cycle environments with elevated valuations and decelerating — but not collapsing — growth tend to deliver modest forward returns on broad equity indices, materially better returns on quality and value tilts, and outsized risk-adjusted returns on diversifying assets like private credit, real assets, and selective alternatives. None of this is a forecast. It is a base rate.

What this means for portfolios

The implication is not to make a directional bet on the cycle. The implication is to construct portfolios that are robust across the plausible distribution of outcomes — portfolios that participate in continued constructive markets but are not relying on a continuation of the trend that brought them to this point.

For most of our clients, that has meant trimming positions where concentration risk has crept up, adding modestly to quality and value exposures, increasing allocations to private credit where liquidity permits, and maintaining a higher than typical allocation to short-duration fixed income as dry powder. None of these are dramatic moves. They are the kind of incremental positioning shifts that, compounded over a cycle, separate portfolios that survive late-stage volatility from those that don't.

The risk we're watching

The single risk we're paying closest attention to is not a recession. Recessions are well-discounted by markets in both directions. The risk we're watching is a regime change in the rate environment — specifically, the possibility that long rates rise materially even as short rates fall, in response to fiscal pressure or term-premium reset. That would be unkind to long-duration assets and to the equity multiples that have been supported by lower long rates. It is not our base case, but it is a tail we're positioned for.

As always, the portfolio decisions that matter most are the ones made before the catalysts arrive, not after.