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While the short and long-term merits of reducing or eliminating the future probability of Iranians having dangerous nuclear weapons can be debated, along with the methodology in which this elimination is achieved, one positive side effect of this mission has surfaced.

Not only has the war let the air out of a number of 2025’s ever-inflating bubbles, along with completely popping many of 2023-2024’s bubbles, but the latest equities market correction has normalized valuations for major indices like the S&P 500 as prices have fallen while earnings rose in the first quarter.  We had previously discussed the need for these speculative bubbles to deflate so markets could avoid a major future bear market. The war has become the antidote. Let us examine what occurred in three short months so far in 2026.

First, over 100 companies in the Russell 1000 index (1000 largest companies in the U.S.) are down at least 25% this year after only three months. The list of these companies is a who’s who of previous speculative bubbles. Cohorts include boutique software companies that traded at 20, 30, or 40+ times revenue, and private credit companies that could provide investors with fixed income that generated the returns of stocks, until they didn’t. Additionally, remember the hot “buy-now pay-later” companies?  Well they are in that group too, along with yesteryear’s  hot IPO darlings like Reddit, Duolingo, Robinhood, and SoFi. The best performer of these IPO darlings is down over 50% from recent highs.  Rough start to 2026:

Source: FactSet

Next, as explained late last year, AI is starting to crack. Most of the well-known AI companies have not made new highs in 6-9 months, while the largest AI ETF has corrected 15%, as top holdings have fallen 20-30%.

Finally, the correction has spread to the larger indices where valuations were not terribly excessive such as the S&P 500 Equally Weighted Index and the ACWX Foreign Equities index. No bubble here at 14.6x earnings – a full standard deviation below the ten-year average of 15.7x.

Source: FactSet

Strong outperformance in 2025 for foreign equities with no valuation issues.

Source: FactSet

The recent war-induced correction has not only popped and deflated numerous speculative bubbles, but has reduced global stock valuations to reasonable levels. So what are the next hurdles on the horizon?

We have spoken a number of times about the probable increase in volatility during the middle of 2026 due to the mid-term elections in November and markets becoming comfortable with the new Fed Chairman, Kevin Warsh. Meanwhile, the Iran situation continues, along with increased fears of a recession and future inflation. Although it is impossible to perfectly gauge these probabilities, two indicators can guide us to proper conclusions over the next few months.

On the recession side, closely monitoring high-yield spreads is important. We monitor high-yield credit spreads for recession probabilities because they act as a leading indicator of corporate solvency and overall economic health. The “spread” is simply the yield premium required by investors to hold riskier corporate debt versus simply owning Treasuries. Wider spreads (above around 5%) are pricing in default risk and tighter lending conditions. So what do spreads indicate today? Well, not much. Although they are off the absolute low of 2.70%, they are well below average at only 3.28%.

On the inflation side, the 5 year breakeven inflation rate has ticked higher, but sits in the middle of the 5 year range.

However, longer-term inflation is even more tame, hovering near the Fed’s 2.00% target. Below is the 5 year breakeven inflation level 5 years from now. We calculate this by comparing the yields of nominal and inflation-protected bonds (TIPS) in maturities from 5 to 10 years. Nothing to see here so far.

What can we conclude from everything discussed? First, popping and deflating bubbles is healthy, especially when the bubbles are isolated to small speculative cohorts. The reason why deep fundamental and valuation analysis is so important lies in the fact that on average, over 50% of public companies delist every twenty years.  Second, the more AI continues to crack, the better off the rest of markets are over the longer-term, as rational markets are healthier than speculative ones. Third, recession and inflation indicators are tame at this point. And fourth, unless the war becomes prolonged, it is likely the recent correction that nearly reached 10% for the S&P 500 (and far more for other segments), could be ultimately limited to something less than a full bear market of 20% or more during 2026, even with the shorter-term election and Fed headwinds.

That dynamic is changing. In the first quarter of 2026, the equal-weight S&P 500 outperformed the cap-weighted version by a meaningful margin. The S&P 500 Equal Weight Index was up ~1% during the quarter, while the S&P 500 Index declined ~5%. Across the market, smaller market-caps and styles that have been out of favor for so long began to outperform: small caps gained ~1%, large-value was up ~2%, and high-dividend-paying companies were up double-digits. After years of narrowing, the market is broadening again.

Source: Goldman Sachs

The Concentration Problem

The degree of concentration that built up over the past three years was extraordinary by any historical measure. At the peak in late 2025, the top ten stocks in the S&P 500 accounted for ~40% of its weight but only about 32% of its earnings. The average P/E of the top ten traded at a premium of nearly 57% to the remaining 490 names. As we have discussed previously, an investor who believed they owned a diversified portfolio through a cap-weighted index fund was, in practice, making a highly concentrated wager on mega-cap technology and the trajectory of AI monetization.

We do not dismiss the quality of these businesses. The largest companies in the S&P 500 are among the most profitable enterprises in the history of capitalism, with operating margins, free cash flow generation, and balance sheets that dwarf prior cycles’ leaders. This is not the late 1990s, when Cisco and Intel traded at triple-digit earnings multiples on cyclical hardware revenues. The fundamental case for many of today’s mega-cap leaders remains sound.

However, valuation is a different question than quality. From 2003 through 2022, the
equal-weight S&P 500 outperformed the cap-weighted index by a compounded rate of over 115%, reflecting the persistent tendency of relative winners to mean-revert and the mathematical advantage of rebalancing away from overvaluation.

Source: FactSet

That relationship broke down entirely during the AI-driven concentration of 2023 to 2025. History does not repeat itself, but it rhymes with uncomfortable regularity. After the dot-com peak, the equal-weight index outperformed the cap-weighted S&P 500 for seven consecutive years. During the so-called “lost decade” from the end of 1999 to the end of 2009, the equal-weight index returned ~65% while the cap-weighted S&P 500 declined ~9%.

What Is Driving the Shift

Several forces are converging to support broader market participation. First, sector leadership has rotated. Energy stocks have benefited from a combination of supply discipline, rising geopolitical risk premiums, and the structural demand created by AI data center buildouts, which require enormous quantities of power. Materials are being supported by a weaker dollar and improving global manufacturing sentiment. These sectors had been afterthoughts during the AI mega-cap rally, and their resurgence is pulling the equal-weight index higher.

Second, the AI narrative itself is evolving. The release of Anthropic’s Claude Cowork and its ability to easily automate workflows and code sent shockwaves through the software-as-a-service sector (SaaS). Hundreds of billions of dollars of market capitalization evaporated from SaaS companies in a matter of days. The question is no longer simply “who is building AI infrastructure?” but rather “which companies can demonstrate a return on their AI investments?” This shift in focus favors a broader set of businesses beyond the hyperscaler oligopoly that dominated the prior phase of the trade.

Third, the valuation gap between the largest stocks and the rest of the index had stretched to levels that invited mean reversion regardless of the catalyst. The cap-weighted S&P 500 traded at a 29% premium to the equal-weight version at year-end. When concentration and valuation premiums reach extremes, the market does not need a crisis to broaden; it needs merely a pause in the narrative that justified the concentration.

Source: Goldman Sachs

What It Means for Portfolios

We believe the broadening of market participation is a healthy development, and one that our multi-asset class, style-agnostic investment approach is well positioned to capture. Narrow markets create fragile markets; when index performance depends on the continued execution of a handful of names, a single earnings disappointment or a shift in sentiment can produce outsized drawdowns. Broader markets distribute risk more evenly and create a wider set of opportunities for active selection.

That said, broadening of the market does not mean that mega-cap technology has become a poor investment. It means that the valuation premium embedded in those names leaves less margin for error, while the rest of the market offers more favorable risk-reward characteristics. In fact, in the aftershocks of the SaaS sell-off we increased existing positions and added new names. If AI monetization accelerates faster than expected, or if the hyperscalers deliver another cycle of earnings beats, concentration could reassert itself. We are not calling for the end of large-cap technology leadership. We are observing that the market is pricing in less certainty about that leadership than it was a few months ago.

The practical implication is straightforward. Portfolios that are overweight passive cap-weighted index exposure are carrying more concentration risk than many investors realize. An allocation to a broad list of names, small and mid-cap equities, and sectors beyond technology can improve diversification without sacrificing participation in the broader market’s upside. The Osborne Partners Investment Team continues to monitor the evolving dynamics between market concentration and breadth, and we are focused on identifying opportunities where we believe the risk-reward is most favorable.

Given the new and rapidly evolving backdrop, the Federal Reserve stood pat. The March FOMC meeting concluded with an 11-1 vote to keep rates unchanged. Chair Powell acknowledged that the surge in energy prices and a hotter-than-expected inflation print created “significant uncertainty” around the path forward. The market’s prior conviction around multiple rate cuts in 2026 has not just been tempered but completely reversed. Fed funds futures pricing shifted to implying a rate hike by year end. The 2-year Treasury yield spiked as much as 0.60% in March alone, flipping from fully pricing one rate cut to fully pricing one rate hike in just three weeks. The change reflects the risk of the FOMC raising rates to combat higher energy costs flowing into inflation.

Treasury Yields Surge amid Energy Crisis, Cost of War

Q1 2026 Performance

Other Items of Interest

March FOMC Dot Plot

Source: FOMC, Bloomberg

The FOMC’s March Dot Plot reflects a more cautious outlook. The median projection calls for just one rate cut in 2026, in line with December, however the number of members seeing two or more rate cuts fell from eight to five. The committee remains quite divided: seven members see no change this year, seven see one cut, and five see two or more. At the March meeting, Governor Miran was the lone dissenter in the 11-1 vote, preferring a quarter-point cut, but aside from him, the rest of the voting members remain apprehensive to change policy in the current environment. While the near-term picture is clouded by the energy shock stemming from the conflict in the Middle East, the longer-run projections continue to point toward a terminal rate (i.e., “Longer Term”) around 3%.

Fed Funds Futures Pricing

In the most dramatic shift in rate expectations since the hiking cycle of 2022, the market has not only abandoned the rate-cut trade but in fact shifted toward expecting a rate hike. As of late March, fed funds futures pricing had assigned a ~30% probability that the Fed would raise rates at least once before year-end. However, as of this writing in early April, the market has moderated that view to a 10% probability (table below). Futures positioning points to the September and November FOMC meetings as the most likely candidates for action, by which point the Fed will have several additional months of inflation and jobs data, in addition to a potential resolution of the situation in Iran, to evaluate.

Source: CME Group, as of April 6, 2026

Update on FOMC Chairman Nomination

The saga of the Federal Reserve chairmanship took several new turns in the first quarter. President Trump nominated Kevin Warsh on January 30th, a name we flagged as a top contender in prior editions of the Wealth Report, and the nomination was formally sent to the Senate on March 4th. However, the confirmation process has faced significant obstacles: Senator Thom Tillis has pledged to block any Fed nominees until the Department of Justice drops its criminal investigation into Chair Powell, and Democrats on the Banking Committee have taken a similar stance. However, in a late-quarter development, the Senate Banking Committee signaled it is now preparing to move forward with a confirmation hearing, with plans pointing to the week of April 13th. Chair Powell, for his part, stated at the March press conference that he will serve as “chair pro tem” (as “required by law” – as Powell did in 2022 awaiting his own re-nomination) if Warsh is not confirmed before his term ends in May. The timeline remains tight, but the scheduling of a hearing represents meaningful progress. We expect to see this topic come back toward center stage during the second quarter.

1. Lower borrowing costs for first-time home buyers (i.e. parent-to-child promissory note)
2. Freeze future appreciation & estate taxes (i.e. IDGT, Intentionally Defective Grantor Trust)
3. Seller-financed business sale at minority discount (FLP, Family Limited Partnership)

Additionally, I will explore the pros and cons of these three intrafamily loan strategies, logistics, tax considerations, and mistakes to avoid when structuring them.

Before delving into each of the three strategies, it is crucial to understand what makes intrafamily loans so universally appealing, regardless of their use (i.e. family lending, estate planning, or tax management). A large part of their value is due to the arbitrage in the interest rate differential between a conventional commercial lender and the federal government.

For example, for a conventional loan, a commercial lender needs to account for many risks during the underwriting process, including credit and prepayment risk. Additionally, they need to account for origination costs and earn a profit. Due to these risk premiums and profit motive, a commercial loan (i.e. mortgage) is priced at a spread above the 30-year Treasury bond. On the flip side, for individual private transactions (under the rubric of “intrafamily loans”), the IRS simply requires a minimum interest rate, or AFR (Applicable Federal Rate) to be set between lender and borrower; everything else is secondary. If the lender meets the “floor” of this AFR, the loan is not categorized as a taxable gift for the purposes of the federal government.

In short, the lower rate (AFR) approved by the IRS allows intrafamily loans to be a much cheaper way (than bank lending) to effectuate many financial planning strategies, including family lending, estate planning, and tax management.

FAMILY LENDING – PROMISSORY NOTE

One use of an intrafamily loan is for parents to help their children lower the borrowing cost when buying a first home.

First, close your eyes and try to remember the experience of buying your first home. Perhaps, feelings of palpable excitement and fresh promise come to mind. Or, quite possibly, the feelings of emotional and financial stress also bubble up from the deep recesses of memory. Faced with the financial burden of buying their first home, it is likely that your adult children feel more pressure than promise in the current moment, and for good reason.

For one, mortgage rates are currently twice as high as they were just five years ago.¹ In addition, the lack of affordable housing, tighter credit and lending standards (post-2008 housing crisis), and a dearth of entry-level jobs add enormous challenges for young adults faced with the prospect of buying their first home. For these reasons, an intrafamily loan may make sense.

Hypothetical 1: Tom and Cindy Von Hetting are a young family living in the Bay Area looking to buy their first home. Let’s assume they pass the strict credit and underwriting standards (high FICO, low debt-to-income ratio) and prequalify for the lowest mortgage rate on the market. After providing a 25% down payment, they secure a $1,000,000 non-conforming jumbo loan. Based on today’s rates (as of the writing of this article), their 30-year jumbo loan would be priced at ~6.25%. The monthly payments for this young family would set them back $6,157.

Hypothetical 2: Tom’s parents decide to lend him the $1,000,000, so he doesn’t have to secure an expensive bank mortgage. The family drafts a promissory note, and they characterize it as an “intrafamily loan.” Further, the intrafamily loan is tied to the long-term AFR of 4.63%.² Assuming a 30-year amortization schedule, Tom would owe his folks $5,167 per month (principal and interest), or $1,000 per month less than the bank jumbo loan under hypothetical 1!

Hypothetical 3: Tom’s parents opt to lend him $1,000,000, but they draft the intrafamily loan payments as “interest-only.” To further lessen the burden for Tom’s young family, they set the rate at the short-term AFR (vs. long-term). Other provisions – including the right to refinance and a balloon payment – options are added. Based on a 3.53% AFR, the new monthly payment would be $2,941 per month, or $3,215 less than the original jumbo loan under hypothetical 1!

There are additional benefits beyond the lower monthly loan payments for the children, not to mention the parents, creating a mutual benefit. For example, the borrower would be able to deduct their loan interest payments against their income (on Schedule A, up to $750,000), which is a tax benefit. While the lender would owe income tax on the interest paid to them, they would still receive ~3.5% on idle cash (akin to money market rates) and have the satisfaction of helping their children.

ESTATE PLANNING – FREEZE FUTURE APPRECIATION AND ESTATE TAX

Intrafamily loans can also be an effective tool to implement estate planning strategies. By setting up an IDGT (intentionally defective grantor trust), a family can leverage an intrafamily loan to freeze the future appreciation of high-growth assets (i.e. stock, real estate, or business assets). Just like the previous example (parent-to-child promissory note), the utility of the IDGT as an effective estate planning strategy is due to the arbitraging of the interest rate differential – this time between the AFR and the high growth asset.

Hypothetical: Alexandra McFagan is an executive at a medical device company. Over her 25 years at the company, she has seen her company shares increase 20x in value. Even though the industry recently pulled back on tighter regulations, her $10,000,000 in corporate stock has an adjusted cost basis of $500,000 and significant unrealized capital gains. The recent drop in price, coupled with significant unrealized gains, and exciting new medical patents make Alexandra reluctant to sell. The shares also pay a juicy 3% dividend which has been consistent over the years.

Alexandra decides that an IDGT is a great vehicle to consider as part of her overall estate plan. When fully implemented, Alexandra will have swapped the high growth stock out of her taxable estate, in exchange for a low interest-bearing note.

Alexandra takes the following steps:

Step 1: She drafts an IDGT (with attorney) and initially gifts cash (seed money) into the trust.

Step 2: She (as grantor) sells the $10,000,000 in company stock to the IDGT in exchange for a promissory note.

Step 3: She sets the interest rate of the promissory note at the long-term AFR (> 9 years), or 4.63%.

In essence, by swapping a high growth asset out of her estate for a promissory note, her estate is freezing the future appreciation of said growth stock. By default, not only is the future appreciation sheltered from the 40% estate tax, but the “swap” is not part of the lifetime gift exclusion.

Put more simply: If the company stock has a higher long-term return than the interest owed on the promissory note, this strategy provides estate tax arbitrage.

Fast forward 20 years from today. Let’s make the following assumptions: First, Alexandra’s company stock earns 10% per year (after-tax) inside the IDGT. Second, although the IDGT pays the grantor 4.63% per year (AFR of intrafamily loan), a large part of the cost is supported by the stock dividend. The differential between the growth rate of the company stock and AFR of the promissory note results in significant appreciation outside of the taxable estate.

The $10,000,000 (from the initial swap) has grown to $28,466,862 over 20 years – after interest payments and taxes (paid by the grantor)! More importantly, this sum has been irrevocably removed from the taxable estate. The rate of 40% not paid in estate taxes on the $18,466,862 growth amounts to savings of $7,386,745!

One thing to note: an IDGT requires that the grantor pay the taxes, not the trust itself. This fact is very important to understand.

FAMILY BUSINESS SALE – FLP (FAMILY LIMITED PARTNERSHIP)

Last, intrafamily loans can also be used to finance the sale of a family business at a minority discount. For this strategy, an intrafamily loan (between parent and children) is often paired with an FLP (Family Limited Partnership).

There are four primary benefits. First, the AFR on the loan provides an incredibly low interest rate. Second, the FLP structure enables a minority discount and a reduced sales price (from parent to child). Third, the sale of the business shifts the future growth to the children. Lastly, any capital gains are spread over the life of the loan.

Hypothetical – Maria and Zac are owners of a family business that has been appraised at $10,000,000. They want their five children to eventually own the business, however, they have other considerations. For example, they want to minimize their lifetime gifting exemption, maintain some control, and freeze estate value. Maria and Zac decide to form an FLP and combine it with an intrafamily loan.

For the first step, Zac and Maria create an FLP and include their business under the partnership. The initial ownership is 1% owned by their five children, and 99% owned by Maria and Zac.

For the second step, Zac and Maria gift 40% of their interest to their five children, or $4,000,000. The good news is that they can discount this gift at a 32% rate, due to lack of control (i.e. voting) and marketability. In short, this $4,000,000 gift uses up only $2,720,000 of their lifetime exemption ($4,000,000 x {1-32%})! The five kids now own 40% of the family business at a steep discount.

For the third step, Zac and Maria sell the remaining 60%, or $6,000,000 to their kids through a seller-financed intrafamily loan. Let’s assume that the terms are over 15 years and at the low AFR rate of 4.5%. Again, due to the 32% discount (lack of control and marketability), the loan value is priced even lower, at $4,080,000 (1-32%). The interest payments due (based on AFR) are $377,000 per year.

To help ease the burden on their five children, Maria and Zac use their annual gifting exclusions to help with cash flow. As previously mentioned, these annual gifts don’t eat into their lifetime gift since they don’t bump over the annual exclusion. However, the annual gifts do reduce their taxable estate. As importantly: assuming Maria and Zac gift $38,000 to each of their five children and their spouses, the annual gifts completely offset the loan payment ($38,000 x 10 gifts = $380,000 ~ annual loan payment).

In effect, the parents used an intrafamily loan coupled with an FLP to transfer their business to their kids. Not only did the minority discount lower their initial taxable gift and subsequent sale, but the transfer spreads out capital gains and freezes the future appreciation out of their taxable estate. The cherry on top? Their annual gifts (up to the exclusion) essentially offset the cost of the interest payments owed by their five children.

MISTAKES TO AVOID

When structuring intrafamily loans, there are four main mistakes to avoid.

The first mistake is applying an interest rate that is less than the AFR. If the IRS were to audit this occurrence, the loan automatically becomes a taxable gift subject to lifetime exemption. Intrafamily promissory notes (real estate purchases) are especially scrutinized, so caution is key.

The second mistake is avoiding documentation. Without documentation, the IRS can argue that the loan was a gift from the outset. Thus, it is crucial to create a promissory note (with an attorney or CPA) that lays out the official details (date, AFR, terms, amortization schedule, and signatures). Some of our clients have even demanded a notary or witness for formality!

The third mistake is the irreconcilability of income and deductions. For example, if the borrower deducts interest as a tax benefit, the lender must claim interest as taxable income. In short, the deductibility of the interest income (Schedule A of the 1040 for borrowers) must match the interest income (Schedule B of the 1040 for lenders).

The last mistake is when the lender “forgives” the loan without reporting it. If a parent, for example, forgives a $1,000,000 loan after a few years, they must report this amount as a taxable gift on Form 709.

In closing, when used properly, intrafamily loans can be effective planning tools used for lending, tax, and estate planning. Please consult with your CPA or estate planning attorney for tax advice.

¹ https://www.freddiemac.com/pmms

²https://www.irs.gov/pub/irs-drop/rr-26-06.pdf

However, unlike 2025, the calendar of market-moving events is both more complex and potentially more drawn out. To prepare for what we feel will be a more volatile environment, we present our 2026 calendar of events that may shift markets from calm to chaos and back again. True investment discipline and tactical decision-making will likely be required in 2026.

For each calendar event, we list a description, market effect, and potential duration.

JANUARY:

• Corporate earnings season for fourth quarter 2025: Headwind
  • Due to the importance of the holiday season for many companies, a fourth quarter seasonal factor is common. The result is more earnings preannouncements. Additionally, many companies take advantage of the fresh calendar to reset expectations lower for the coming year.

• Fed Chairman nomination: Tailwind
  • Federal Reserve Chair Jerome Powell’s term ends May 15, 2026. President Trump is expected to announce his nomination for the next Chair in January. Trump stated that anyone opposing immediate rate cuts “will never be the Fed Chairman.” Consequently, investors view this event as a positive based on the expectations that the new Chair will pursue a policy of continued interest rate reductions, thus spurring on the economy.

JANUARY/FEBRUARY:

• Supreme Court ruling on tariffs: Uncertain outcome
  • The Court will rule on the legality of the Executive Branch using the International Emergency Economic Powers Act (IEEPA) to impose tariffs. Two lower courts have already ruled that the IEEPA does not authorize the “Liberation Day” tariffs. While a ruling negating the tariffs would lower the average tariff rate from the mid-teens to about 10%, the Trump administration has prepared contingency authorities including Section 122 (15% tariffs for 150 days), Section 338 (up to 50% for unfair practices), and Section 301 (country-specific targeting).

OTHER FIRST QUARTER EVENTS:

• Japanese carry trade risk: Headwind for everyone’s favorite 7 stocks
  • Japan’s 10-year yield hit 2.10% – highest since 1999 – and the Bank of Japan raised rates to 0.75% in December. Rising borrowing costs in yen pressure the leveraged trade that has funded Mag-7 positions. Any unwind would likely be gradual, not panic-driven.

• U.S. led peace talks with the EU about Ukraine: Tailwind if talks progress
  • The December Trump-Zelenskyy meeting produced “90% agreement” on a 20-point framework. A deal would boost European equities, lower energy prices, and unlock $500+ billion in reconstruction investment. Territorial disputes remain unresolved.

APRIL/MAY:

• First quarter corporate earnings season: Tailwind
  • Companies should begin reflecting the positive effects of 2025’s rate cuts. Consensus expects 12-14% full-year earnings growth.

APRIL:

• Tax refunds: Tailwind supporting higher consumer spending
  • The One Big Beautiful Bill Act will generate what Treasury calls “the largest tax refund season ever.” Estimates range from $91-150 billion above normal, with Treasury Secretary Bessent projecting an additional $1,000-$2,000 refund per household. This functions like a new round of stimulus checks.

MAY:

• New Fed Chairman takes office: Tailwind
  • Likely an inflation dove that will lobby for continued interest rate reductions.

JUNE:

• G7 Meeting in France: Uncertain reaction, often a non-event
  • Hosted by Macron in Évian-les-Bains. Agenda includes Ukraine, China strategy, AI governance, and navigating US tariff policy. First G7 for new Canadian PM Mark Carney and Japanese PM Sanae Takaichi.

• June 17 – First press conference with the new Fed Chairman.
  • Markets will parse every word for policy signals. History leans toward mild initial disappointment as new chairs establish credibility.

JULY:

• July 26 – USMCA trade agreement review: Short-term headwind
  • All three parties must decide whether to extend the agreement 16 years, revise it, or enter annual reviews toward a 2036 sunset. This governs $1.93 trillion in annual trade. Automotive rules of origin are the most contentious issue, with concerns about Chinese materials flowing through Mexico.

AUGUST-NOVEMBER 3:

• Midterm Election: Headwind as uncertainty builds
  • All 435 House seats and 35 Senate seats are contested. Republicans hold the House 220-215; Democrats need just 3 seats to flip it. Historical patterns strongly favor the opposition party – since WWII, the president’s party loses an average of 26-28 House seats.

OTHER: Inflation releases and FOMC meetings

• CPI is released between the 10th and 14th each month. CPI has already normalized from 6.63% to 2.62% versus a 30-year average of 2.40%.
• Fed meetings: Jan 27-28, Mar 17-18, Apr 28-29, Jun 16-17, Jul 28-29, Sep 15-16, Oct 27-28, Dec 8-9. Markets currently price only two additional 25bp cuts for 2026.

A complex and volatility inducing calendar is ahead in 2026. We look forward to using this volatility to our advantage: selling extremely valued holdings and purchasing investments with temporarily improved risk-reward profiles during these macro-driven dislocations.

2025: A Landmark Year for Performance

One of the more surprising developments in 2025 was the notable performance from both precious and industrial metals. Precious metals led the way, with gold up over 67%, and silver up a staggering 149%, marking the best year for both since 1979. Relative to the S&P 500 index, 2025 also marked the largest relative outperformance for both gold and silver vs. the index since 1979. These gains were particularly notable given that they occurred alongside solid equity market performance, rather than in response to a risk-off environment. Industrial metal returns were nothing to sneeze at either. Copper had its best performance year since 2009, up 43%, and aluminum finished 2025 up just shy of 18%.

Catalysts: What Drove Performance in 2025?

What drove the impressive performance for metals in 2025? Given the varied drivers, we’ll look at each individually to parse out what catalyzed performance last year:

As you can see from the table, the performance drivers for metals in 2025 ranged from shifts in central bank policy to how electric vehicles are constructing chassis. It’s a mix of structural, cyclical, and one-off tailwinds – an encouraging mix in our opinion as it reduces the risk of any one specific tailwind reversing, potentially causing a synchronized pullback across the asset class. The fact that the drivers of performance were dynamic also creates opportunities for more nuanced positioning across metals – something our team always strives to take advantage of.

Metals: Role in a Diversified Portfolio

The role of metals in a portfolio is meaningful and multi-faceted – the purpose of each somewhat different than the next. Rather than viewing metals as purely tactical trades, we see them as strategic holdings that can serve defensive, inflation-sensitive, and growth-oriented roles. We’ll take a closer look at the merits of each individually.

Gold:

• Safe-haven: a defensive holding, offering stability in times of geopolitical or financial market distress.
• Inflation Hedge: hedge against elevated inflation and any related U.S. Dollar weakness.
• Low Correlations: low correlation to U.S. stocks, international stocks and bonds helps with risk management and broader wealth preservation.

Silver:

• Enhanced Diversifier: often participates in precious metal rallies as well as industrial growth cycles. Silver’s dual role as both a precious and industrial metal often results in higher volatility but also creates the potential for outsized returns during periods of synchronized demand.
• Growth: Clean Energy Transition: increasing usage in solar technologies and electric vehicles.

Copper:

• Inflation Hedge: copper often performs well during periods of rising inflationary environments.
• Growth: Electrification: structural growth demand from electric grid modernization. AI Beneficiary: demand surge from substantial data center buildout.

Aluminum: 

• Growth: Pro-cyclical Leader: performs well at early stages of cyclical recovery.
• Inflation Hedge: aluminum often performs well during periods of rising inflationary environments.

Metals are just one component in our natural resource asset class but they play an important role in both risk reduction and wealth preservation, as well as contributing to growth. As we do with all positions across all asset classes, we are constantly analyzing exposures across our portfolio to ensure the allocation is consistent with our teams’ views. Different metals, and exposures to those metals, may be appropriate depending on a wide variety of variables including interest rates, inflation, GDP growth, phase of economic cycle, etc. As an example, our team has been overweight gold vs. our benchmark (Bloomberg Commodity Index) for the past several years, driven by many of the factors discussed in this article. After an exceptional 2025, it’s likely not a surprise to hear that sentiment around gold is rather exuberant – something that typically warrants caution. Periods of extreme optimism often precede lower forward returns, even when long-term fundamentals remain mostly intact. Further, should we see the level of geopolitical turmoil ratchet lower or the Federal Reserve indicate a slower cadence of rate cuts than the market expects, we could see gold (and other metals) shed some gains seen in recent years. As such, the team may look to pare back our exposure to gold – effectively reducing our overweight while still maintaining exposure.

As we look ahead to 2026, ongoing geopolitical skirmishes, stubborn inflation and possible green shoots indicating a more robust cyclical recovery could yield another solid year of returns for metals. At the same time, dispersion across metals is likely to remain elevated, reinforcing the importance of ongoing allocation shifts. As always, the Osborne Partners investment team will be sure to keep you updated around any changes in our views on metals as well as the rest of our diversified portfolios. Happy New Year!

Zooming out and taking the year as a whole, it might appear that the asset class performed exactly as designed: providing income and a degree of portfolio diversification without any drama. But under the hood we know it was a hard-won year of returns as existential concerns lingered around the global role of the U.S .dollar, foreign investor participation in U.S. Treasury markets, and the mounting cost of large budget deficits and debt levels.

Looking ahead to 2026, the outlook remains constructive. Attractive starting yields should provide a strong income baseline, credit market indicators remain very healthy, and a smaller federal budget deficit along with declining interest rate volatility are also supportive features. This article explores some key highlights from 2025, as well as a snapshot of rate expectations for 2026.

Final performance

For the full year 2025, performance (on a total return basis) was led by convertible bonds, driven by strong equity markets. High yield corporates and the U.S. Aggregate Bond Index also delivered strong high-single digit returns while long-term Treasuries lagged although still produced a solid 4.25% return thanks to the highest starting yields in 18 years.

The yield curve steepened as the Federal Reserve cut rates and inflation moderated

The U.S. Treasury yield curve “bull steepened” in 2025, which is to say shorter term yields fell more than longer-term yields. To be precise, the 2-year yield dropped 0.77%, the 10-year dropped 0.40%, and 30-year yields rose 0.06%. This reaction in the yield curve is driven mainly by two components: the Federal Reserve cutting interest rates (affecting shorter term rates) and moderating inflation (affecting medium term rates). The longest end of the curve, the 30-year Treasury, is often more of a reflection of the very long-run growth and inflation outlook in addition to long-run structural questions like the stability of the U.S. government and the safe-haven status of the U.S. dollar. With the benefit of hindsight and a year full of data, the evolution of the U.S. yield curve appears broadly consistent with these dynamics.

Treasury volatility declined for the third consecutive year

The MOVE Index, a measure of Treasury bond volatility, was a one-way street in 2025. Excluding the surge in volatility in April, amid the imposition of “Liberation Day” tariffs, the last 12 months continued the trend of easing volatility. Perhaps surprisingly, the index is now well below the 20-year average and within sight of the 20-year low.

A point of observation: three consecutive years of a declining MOVE Index is actually a normal occurrence after a surge in volatility (like what we saw in 2022). Over the last 30 years, there are three instances of multi-year easing in the MOVE Index: 2002-06, 2009-13, and 2022-present. Each followed a period of heightened volatility and the MOVE Index ended at a lower level each time.

Other Items of Interest

December FOMC Dot Plot

For the first time in several meetings, the FOMC Dot Plot update was uneventful. The December plot remained largely in line with September. There were a couple of marginal adjustments, but the net result was no change to the median annual estimate of the Federal Funds rate – that is, a projection for just one rate cut in 2026.

The market remains ahead of the FOMC on rate cuts in 2026

In contrast with the Federal Reserve’s projections, market pricing implies a 75% probability of at least two rate cuts in 2026. The median is for two cuts, but notably the distribution of outcomes is skewed to the downside (i.e., more cuts). While these probabilities will certainly change throughout the year, it is an informative point-in-time view on the market positioning for lower rates in 2026. This highlights a key risk to the 2026 outlook: the potential for the Federal Reserve to provide less monetary stimulus than anticipated.

Update on FOMC Chairman Nomination

Back in July, when we first reviewed the upcoming succession of FOMC Chair Jerome Powell, the race looked wide open with as many as five legitimate contenders. Fast forward to January and it now appears to be a two-horse race. Kevin Hassett and Kevin Warsh have catapulted to the front of the pack, at least according to prediction market pricing. Christopher Waller, once a front runner, is now a distant third. What is interesting about the last month is that in early December, President Trump had reportedly selected his nominee, but declined to reveal the name. No subsequent announcement has been made, suggesting the decision is still not final. A potential twist is that Trump wants Treasury Secretary Scott Bessent to take the seat, but Bessent has stated he doesn’t want the job, and perhaps the two remain in ‘negotiations.’ In conclusion, the succession remains quite uncertain. A decision is expected in January, but it wouldn’t surprise this Investment Team if there is another shoe yet to fall.

For many taxpayers, the most noticeable impact will come from expanded deductions and exemptions that reduce taxable income and, in some cases, may result in larger refunds. According to Treasury estimates, working American families could see tax refunds in early 2026 of $1,000–$2,000 on average due to provisions that affect withholding and deduction eligibility.

Here are some of the key highlights of the changes and considerations.

Income Tax Rates Stay Favorable

Under OBBBA, the familiar individual tax rate structure (10%, 12%, 22%, 24%, 32%, 35%, 37%) becomes permanent, replacing a scheduled return to higher pre-2017 rates in 2026. All brackets are indexed for inflation, reducing fiscal drag and helping taxpayers keep more of their income.

For tax year 2026, the 37% top rate applies to taxable income above:

• $640,600 for single filers, and
• $768,700 for married couples filing jointly.¹

State and Local Tax (SALT) Deduction Changes: A Temporary Boost

The long-debated SALT deduction cap is temporarily expanded for tax years 2025 through 2029:

• Increased from $10,000 to $40,000 for individuals and married couples filing jointly,
• With provisions that begin to phase this benefit out for MAGI above $500,000.

This provision can yield significant federal tax savings for taxpayers in high-tax states especially through thoughtful timing of property tax payments and other deductible expenses.

Charitable Giving: Strategy Matters More

Under OBBBA, the charitable deduction rules shift in two ways:

• Non-itemizers can deduct up to $1,000 ($2,000 married) of charitable cash contributions starting in 2026.
• Itemizers’ deductions are subject to a minimum floor (generally 0.5% of AGI) and retain a 60% AGI limitation for cash gifts.
  • Example: If your AGI is $400,000, the first $2,000 (0.5% of $400,000) of your charitable contributions is not deductible.

These changes underscore the importance of giving strategy. For instance, “bunching” multiple years of contributions into high-income years or using donor-advised funds (DAFs) to maximize the tax efficiency of philanthropy.

Senior Tax Relief

For tax years 2025 through 2028, taxpayers age 65 and over can claim an additional $6,000 deduction on top of the standard deduction. For married couples in this group, the benefit can total $12,000, phased out at higher income levels (MAGI exceeding $150,000 for joint filers).²

This provision can meaningfully reduce taxable income for retired households, particularly those relying on Social Security, pensions, or IRA/401k withdrawals.

Standard Deduction Boosts Middle-Income Relief

The law increases the standard deduction again for 2026:

• $32,200 for married couples filing jointly
• $16,100 for single filers
• $24,150 for heads of household

Compared with the pre-2018 era, these elevated amounts significantly broaden the base of taxpayers who do not owe federal income tax on lower portions of their income, helping many middle-income households reduce their taxable income.

Child and Family Credits and New Savings Vehicles

The bill also expands credits and creates new incentives for families:

• Child Tax Credit is increased to $2,200 per qualifying child (under age 17)
• Additional Child Tax Credit: Up to $1,700 of the credit is refundable, meaning eligible families can receive that amount as a refund even if they owe no income tax.
• New “Trump Accounts” are tax-favored savings accounts for children born between
  2025-2028, offering a $1,000 government seed fund for kids. It also allows $5,000 annual contributions from family and others. Amounts generally cannot be withdrawn from Trump Accounts before January 1st of the calendar year in which the child turns 18 years old. After that point, the account generally is treated as a Traditional IRA and generally is subject to the same rules as other Traditional IRAs. The annual contribution limits are indexed to inflation and will adjust starting after 2027.

These provisions not only support family financial planning but also present opportunities to integrate education or wealth-transfer goals into broader strategies.

Estate and Gift Tax Planning: Higher Exemptions

One of the most impactful long-term changes affects estate planning:

• The lifetime estate and gift tax exemption rises to $15 million per person (or $30 million for a married couple) starting in 2026.

This is a large increase from prior levels and, when indexed for inflation in coming years, may significantly reduce the occurrence of federal estate tax for many families. It also creates opportunities to revisit trusts, gifting strategies, and multigenerational planning.

Client Considerations for 2026:

With this mix of permanent and temporary provisions, effective planning becomes even more essential. Here are key checklist items for 2026:

Reevaluate Withholding and Estimated Taxes

The expanded deductions and favorable brackets may mean lower liability, but without updated withholding, taxpayers could see large refunds early in 2026.

Revisit Retirement Withdrawals and Roth Conversions

With stable brackets and larger deductions, the analysis around when to take distributions or convert to Roth accounts may shift for many retirees.

Optimize SALT and Timing of Itemized Deductions

High-tax state residents should work with tax advisors to time deductions and maximize benefits while the temporary SALT expansion lasts.

Strategic Charitable Planning

Review giving strategies, including potential bunching, donor-advised funds, or legacy planning tools, to optimize tax impact.

In summary, the One Big Beautiful Bill fundamentally reshapes the tax landscape for 2026 and beyond. While many provisions provide greater certainty and potential savings, the people who will benefit the most are those who anticipate changes and act intentionally. Working with your Wealth Counselor and tax advisor can help ensure your plan captures the full value of these reforms while also aligning with your long-term goals.

If you would like help assessing how these changes apply to your situation, your Wealth Counselor can provide personalized guidance.

S&P 500 valuation: Presently, the S&P 500 trades at a price-to-earnings ratio of over 22x. To put this in a historic context, since the internet bubble burst 25 years ago, the S&P 500 has traded between 9x (March 2009) and 26x (top of the internet bubble). The long-term average is 16.2x, equating to the index trading 38% above the long-term average today. Statistically, today’s S&P 500 valuation is two-standard deviations above the average (orange horizontal line), meaning valuation should only be this high about 2.5% of the time. Initial conclusion – the S&P 500 is overvalued.

Source: FactSet and Osborne Partners

However, researching the composition of the S&P 500 yields a different take. Today, the S&P 500 is far more concentrated than any time in history. In fact, the 8 largest holdings in the entire index represent over 37% of the index. As a comparison, at the top of the internet bubble in 2000, the 10 largest companies were 26% of the index.

However, concentration risk is only one of six major risks for this cohort of 8 companies.
The risks include:

1. Concentration
2. Valuation
3. Interdependence
4. Customer exposure
5. Competition
6. Correlations to each other

Besides the S&P 500 being 37% concentrated in 8 companies, the valuation differential between the 8 largest and the other 492 is severe. As the following table shows, while the S&P 500 trades at 22.3x (2026 earnings), the 8 largest (37% of the index), trade at a P/E on 2026 earnings of 38x. So while the S&P 500 trades at a 38% premium to the long-term average, the 8 largest companies trade at a 72% premium to the “overvalued” S&P 500.

Source: FactSet and Osborne Partners

Meanwhile, the approximate total value of the other 492 companies divided by the estimated earnings of the 492 points to a P/E of well under 19x, making the 8 largest 100% more expensive than the 492.

However, as the internet bubble proved, valuations can remain overinflated for long periods of time. So while concentration and valuation risks can continue, the fundamental nature of these companies are where the more serious risk may reside.

What makes today potentially riskier are the interdependence, customer exposure, competition, and correlations of these 8 that are 37% of the index. Many investors are unaware of these risks.

Interdependence:  Many of these 8 largest are dependent on each other. Here are three examples:

• NVDA – Data center revenue is 88% of the total company revenue. Depending on the quarter, we estimate 55-65% of revenue is derived from the other 7 largest companies. For example, in the most recent two quarters in 2025, approximately 50% of NVDA’s growth was derived from MSFT and AMZN alone.
• AMZN – Hosts both META and AAPL data in their datacenters.
• AVGO – Depending on the quarter, we estimate approximately 56-60% of total company revenue comes from selling cloud software and semiconductors, along with semiconductors for AI (custom AI accelerator chips and networking chips for AI related datacenters).

In contrast, at the top of the internet bubble, the 10 largest companies were far less dependent on each other and far more diverse.

Source: S&P 500

Customer and end-market exposure: While all of these companies are scrambling to buy as many semiconductors as possible from NVDA, they are using the semis to serve many of the same customer types in the same sectors.

Exposure to cloud storage:

• MSFT, GOOGL, and AMZN are 70% of the total market.
• MSFT cloud revenue is 38% of total revenue.
• AMZN cloud revenue is 20% of total revenue.
• GOOGL cloud revenue is 17% of total revenue.
• AVGO semis and software revenue for the cloud are 25% of total revenue.

Exposure to AI cloud based and consumer based paints the same picture:

• Cloud corporate AI largest companies = MSFT, GOOGL, AMZN, META
• Consumer AI largest companies = AAPL, META, AMZN

Exposure to online ad market. Three of the 8 largest companies total 60% of the online ad market.

• GOOGL, META, and AMZN are approximately 60% of total market

Competition: The interdependence and end market exposure means most of the 8 largest are competing for the same customers:

• Semiconductors: 88% of NVDA’s revenue mostly builds out data centers. 55-65% of revenue is from 6 customers who directly compete with each other in the same sectors. Additionally, NVDA competes with AMD, INTC, QCOM, AVGO, and in-house created chips from GOOGL (Tensor), AMZN (Trainium), and MSFT (Maia).
• Cloud storage: MSFT, GOOGL, AMZN plus BABA and ORCL, we estimate to be about 80% of the global storage market. This is a cut throat end market with high capex.
• AI: The largest 7, excluding NVDA, derived less than 10% of revenue from AI, but the spend is massive for MSFT, AAPL, AMZN, and GOOGL.
• Online ads – As previously shown, three of the largest seven are 60% of the market.

Correlations: The result of the interdependence, customer exposure, and competition is that the stocks of these companies are increasingly moving in tandem. The following table shows the correlations between each other for the past five quarters (3Q 2024 to today).

• 1.0 = Perfect positive correlation.
• 0.0 = No correlation.
• -1.0 = Perfect negative correlation.

Example: A correlation of 0.80 means if one rises/falls 10%, the other rises/falls 8%.

So not only is 37% of the S&P 500 comprised of these 8 companies, but these 8 companies trade at a 38x P/E on 2026 earnings, while being interdependent on each other, having exposure to the same end markets and customers, and competing against each other, while their stock prices move in the same direction by as much as a factor of 0.88.

At Osborne Partners, while we have exposure to some of the largest 8, we are careful about correlations, valuation, and position sizes within portfolios.

But what about the other 63% of the S&P 500 in 492 companies?

These companies trade at less than half of the valuation of the largest 8. However, a large swath of the 492 receive fundamental tailwinds from a lower Fed Funds target rate, which is now 4.25% from a recent peak of 5.50%. Examples can be found in the Consumer Discretionary and Financial sectors. Additionally, there are sectors that are suddenly trading near record discounts to the S&P 500 due to recent underperformance. One example is the healthcare sector that now trades at a 26% discount to the S&P 500 versus a 0% discount just a few years ago.

Source: FactSet

We are delivering a dual message here. First, although the 8 largest are high quality companies, investors should be careful about high exposure to them due to the fact they mirror each other in many ways. Second, if and when these 8 return to some version of normalcy via a rerating lower, there is plenty of value and positively inflecting fundamentals in the other 492 companies in the S&P 500. Just as we felt many of the largest 8 were generational values exiting the global financial crisis in 2009, we now believe many of the best future opportunities lie outside these 8.