I’m not a fan of the whole prediction game.
But we’re at the start of a new year, and I have some thoughts on what’s ahead that I wanted to share with you.
A few things I’m watching:
- Why I think there’s trouble brewing in AI
- The companies that sat out the 2025 party but might finally get their turn
- Why “boring” might be the best investment strategy this year
I put together a short video where I share what I’m paying attention to and how that’s shaping the way we invest this year.
Transcript
Happy New Year to our Solidarity family. You know, I hate making predictions. If you get it right, everyone says it was obvious. If you get it wrong, well, you never hear the end of it. While predicting the exact movements of the markets is impossible, it’s important to develop a thesis on where you believe companies can go in the long run. That’s the approach I take, and right now there’s one area that stands out as particularly important. AI.
AI Investing and Valuation Concerns
Let me start with the elephant in the room, or should I say the bubble in the room. I think we’re going to see some serious trouble in AI this year.
Now, our compliance folks won’t let me name specific companies, so let’s just say there’s a hypothetical company we’ll call Goofy, because honestly some of these valuations are just that, Goofy. Here’s what’s happening.
AI Infrastructure Spending and Investor Expectations
Companies have spent hundreds of billions of dollars building out AI infrastructure, and investors are starting to ask a pretty reasonable question. When do we actually see a return on all of this spending?
There’s also this thing called circular financing that should concern people. It’s where company A invests money in company B, and then company B turns around and uses that money to buy products from company A. It looks like sales growth, but there’s no real value being created. We saw this exact playbook during the telecom boom in 2000 and 2001, and we all know how that ended.
Competition Risks in the AI Industry
Add to that the fact that your customers are also becoming your competitors. Companies that were buying AI chips are now developing their own. That changes the game pretty dramatically.
Market Corrections and Financial System Health
Now, does this mean everything crashes tomorrow? No, but in my mind it suggests there is some air that needs to be let out, which is a sign of a healthy financial system. Markets can stay irrational for longer than any of us can stay solvent, but the drumbeat is getting louder. People are asking harder questions, and that’s usually how markets correct and adjust.
Why “Boring” Businesses May Matter Again
Here’s what I’m actually excited about. I think 2026 is the year boring comes back. There are fantastic businesses out there trading at much more reasonable earnings ratios, well below the market average, that have been sitting out the party while everyone chased the shiny AI story.
These companies generate strong cash flows, have solid fundamentals, and have real sustainable business models. When people finally look up from the flashing lights and realize there are great investments that aren’t purely tied directly just to AI, I think those companies are going to have their moment this year.
Interest Rates, the Fed, and Economic Impact
One thing I feel pretty confident about is that we’re going to have lower interest rates in 2026. We’re almost certain to have a new Fed chair, and based on everything we’re hearing, that person is going to be far more dovish than the current leadership. Lower rates matter for consumers, for businesses, and they matter for housing. Think about all the people who want to move or buy a house but have been stuck because mortgage rates were in the sevens and the eights.
When rates drop and people start seeing mortgages with a five handle, you’re going to see movement. That opens up spending in other areas, and for an economy that’s two-thirds dependent on consumption, that’s fuel for the fire.
S&P 500 Concentration Risk Explained
Now here’s something most people don’t think about. If you’re buying a standard S&P 500 index fund right now, about 9% of every dollar you invest goes to our hypothetical friend, Goofy. 9 cents of every dollar. And when you add in a few of Goofy’s overvalued friends, let’s call them dopey and grumpy, you’re looking at 12 to 13 percent of your portfolio in just three names. That’s a lot of concentration in companies trading at which are very high.
Equal Weight Indexing and Portfolio Balance
The equal weight index, on the other hand, gives every company approximately the same allocation. When the overvalued names have a bad day, which they will, the equal weight holds up much better.
We’ve already made this shift in many portfolios, and on down days for those big names, we’re seeing it pay off.
Solidarity’s Investment Philosophy
What this means for Solidarity clients. Our core thesis has always been to buy great businesses. That’s how we’re built. We invest in companies we understand incredibly well, trading at justifiable valuations, have a thesis around each business and their business models with specific catalysts we believe in. Not just because they’re popular.
We believe our focus on owning great businesses helps us navigate volatility more effectively. When you pile into high flyers, the big question becomes, can they sustain this growth? And on top of that, you have to try to time your exit. We prefer to invest in businesses that are solid and sustainable, not driven by the whims of the market.
Revenue Quality and Shareholder Alignment
We want consistent revenue. We want real growth. And if a company says they’re buying back shares, we actually want to see the share count go down, not stay flat or go up because they’re handing out stock-based compensation like candy.
Late-Cycle Markets and Investor Mindset
What it all means, volatility is okay. Are we in the late stages of the bull market? Probably. Does that mean we need to panic? Absolutely not. It means we need to be thoughtful, disciplined and ready to act when opportunities present themselves.
As we saw earlier last year, volatility can pop up at any time. As we think about investments and investing, we don’t see this as a bad thing, but rather as healthy.
Long-Term Perspective for 2026
When volatility hits, and it will, we’ll be the ones happily adding to our positions and great businesses at better prices, while many others are too afraid to open their phones.
We continue to be constructive about the economy and believe there are great times ahead on the horizon. Of course, there will be bumps along the way, just like always, but we’ll stay focused on guiding our clients toward their most important goals, regardless of what the market brings.
That’s how we’re thinking about 2026, not with fear, but with clarity about what’s real and what’s hype.
Here’s to a prosperous year ahead.
