We recently sat down with Cary Baronian, Partner & Managing Director of Investments, to reflect on the past year in the markets and share the investment team’s perspective as they look ahead to 2026.
In this interview, Cary recaps the equity market’s strong returns in 2025, explains why the economy appears to be on a knife-edge, and outlines how these views are shaping portfolio management decisions, including thoughtful rebalancing and ongoing evaluation of potential new investment strategies.
Q: How would you recap the past year in the markets?
A: The equity market delivered another year of strong returns, driven by optimism around artificial intelligence and resilient consumer spending that underpinned healthy corporate earnings. These results occurred against the backdrop of significant uncertainty and numerous challenges, including a weakening labor market, headline inflation that declined but remained above the Federal Reserve’s target, rapidly changing tariff policy and trade tensions, and the longest U.S. government shutdown in history.
Our client portfolios generally performed as we intended. They protected capital during the market’s one period of meaningful downward volatility, the Liberation Day sell-off in April, and they participated as the market rebounded.
Our target allocations for balanced portfolios generally produced favorable results in 2025 and our balanced model portfolio returned approximately 14% for the year, while we continued to manage risk and emphasize liquidity.
Q: What are your thoughts on the economy as we head into 2026?
A: The economy appears to be on a knife-edge, characterized by a weakening labor market alongside a positive wealth effect (impact of higher stock prices on net worth) and resilient spending from upper-income households. We are skeptical that this dynamic can persist. Either the labor market will stabilize, which should support income growth and consumer spending, or unemployment will continue to rise, raising the likelihood of a recession.
On the policy front, the stimulative provisions of the One Big Beautiful Bill Act are expected to provide fiscal support. However, the negative impact of tariffs is projected to increase, which would offset much of the benefit.
At the same time, investors are anticipating two interest rate cuts from the Federal Reserve this year, which may not be sufficient to boost growth. There have been six cuts since the Fed began this easing cycle, and the most interest rate-sensitive sectors, housing and manufacturing, have yet to show clear signs of improvement.
Encouragingly, headline inflation continues to trend lower, which should reduce the likelihood of the Fed shifting to a more restrictive stance.
Artificial intelligence remains an important area of focus. It is impacting the economy through increased business investment and a positive wealth effect. However, expectations for AI-related capital spending remain eye-popping. Businesses will ultimately need to demonstrate that these investments can translate into measurable productivity gains and sustained profit growth.
Q: How are these views shaping your portfolio management decisions?
A: Equity markets have come through a period of exceptional returns. In particular, the past three years were astounding using any historical context.
We do not extrapolate these results into the future. Markets may have pulled forward some future returns. As discussed earlier, we see an evolving economic landscape with a wide range of potential outcomes. This environment reinforces the importance of disciplined portfolio management, including thoughtful rebalancing, to ensure portfolios remain aligned with each client’s risk tolerance, objectives, and long-term plan.
Additionally, we continue to evaluate potential new investment strategies with the goal of optimizing risk-adjusted outcomes.
Q: Can you give an example of how that thinking translates into strategy?
A: Yes. We are proactively assessing the U.S. large-cap space. The federal government is playing a more prominent role in influencing corporate outcomes, increasing both industry- and company-specific risk.
As a result, we see a strengthening case for more diversified exposure while remaining true to our philosophy of owning high-quality assets at fair prices. In practice, this could involve augmenting our core equity holdings with a low-cost passive ETF that possesses similar characteristics.
Q: What’s the key message you want clients to take into 2026?
A: We continue to position portfolios with the goal of weathering uncertainty while pursuing long-term objectives. We are entering the New Year with gratitude and humility. Thank you for the trust and confidence you place in us.
Disclosure: The model portfolio represents a pre-defined investment allocation intended to reflect a specific risk/return profile and align with Heritage’s investment philosophy. Past performance is no guarantee of future results. There can be no assurance that the future performance of any specific investment or investment strategy will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Returns are net of Heritage’s advisory fee. Account information has been complied by Heritage and has not been verified. These materials are provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities.
