Quarterly Insights: January 2026
As we embark on a new year, we continue to advise clients to position portfolios more conservatively to match today’s market realities. That may be difficult given the temptation to ride a stock market that has been on a long winning streak. But it is when investor sentiment is strong and asset valuations are rich that investors need to be the most cautious.
To be clear, we are not predicting a recession or a deep market correction in the year ahead. It is far too difficult to make accurate near-term forecasts, even when they are well supported by data. The benefit of a well-constructed portfolio is that it frees investors from the pressure of trying to time the market. Instead, by building foundational elements of both growth and protection, we can participate in the market’s expansion while being positioned to withstand (and capitalize on) a downturn, should one occur.
With this framework in mind, here are three key dynamics shaping today’s market landscape:
1. Cracks are appearing in the AI trade. While the U.S. economy is on solid footing by many metrics, including GDP growth, much of that strength is underpinned by unrelenting investment in AI infrastructure, the future payoff on which remains a large unknown. If not for the ongoing AI buildout, our economy might have tipped into recession last year.
Though Clifford Swan has a long history of investing in innovation, aspects of the AI boom give us pause. That is based on our observation that even the most promising of technologies tend to follow a predictable cycle: initial excitement followed by a sobering period of adjustment as innovators learn that sustainable business models take time to build.
Skepticism toward AI appears to be growing. Oracle’s recent borrowing spree to fund AI-related expansion has raised concerns regarding its long-term solvency. Even Google, which has allocated significant capital to AI to avoid falling behind its peers, has publicly admitted the boom contains “elements of irrationality.” We are also seeing data suggesting that AI adoption rates among large enterprises are leveling off as they come to see AI as a tool that requires ongoing refinement and customization rather than a magic bullet. In China, where capital cycles unfold quickly driven by a government that fast-tracks infrastructure growth, AI investment has led to some success, but behind that sits a boneyard of defunct upstarts amid swathes of unused data center capacity.
2. The evolution of the credit market may be staving off recession. Typically, financial distress first appears in credit markets. The simple explanation is that bondholders are conditioned to worry; their upside is capped at the principal they have lent out (in contrast to stockholders, whose upside is theoretically unlimited), and thus their focus is primarily on default risk.
Interestingly, the rise of private non-bank lending has introduced some stabilizing dynamics into credit markets. Unlike traditional bank debt or public bonds, alternative lending generally involves less rigid bankruptcy processes. Private lenders typically have more flexibility regarding loan modifications compared to the regulated banking system’s hard rules, enabling trouble spots to remain undercover for longer—perhaps long enough for issues to resolve. Further, while bank lending involves real risk of bank runs (consider Silicon Valley Bank’s rapid demise in 2023) given that there is a demand deposit window, alternative lenders are less prone to a fire sale of assets to pay fleeing depositors. But the rise of non-traditional lending also introduces dangers: structural problems can remain hidden until they become difficult to troubleshoot, and as is the case in any asset class, a lack of capital discipline (e.g., too much capital chasing too few deals) can lead to value destruction. We expect to see increasingly stringent regulations to address these risks.
3. Tariffs are likely to persist as a theme. It is worth exploring why tariffs have not delivered a bigger blow to American businesses and consumers. We believe there are several contributing factors: misunderstandings of tariff math (levies are calculated on declared values, which are usually much lower than retail prices); the willingness of companies to absorb early hits; the resourcefulness of businesses in finding workarounds (including the strategic stockpiling of inventory ahead of more punitive levies); and policy loopholes and exemptions that have kept effective tariff rates well below headline rates. Furthermore, a weaker dollar has helped U.S. exports surge, mitigating the impact of more expensive imports.
Though tariffs have not had quite the effect many predicted they would, they still pose material risks. Many businesses are on edge as they await the U.S. Supreme Court’s ruling on the legality of the administration’s tariffs. However, even if the Court rules that tariffs are an unlawful expansion of the President’s emergency powers, the administration intends to maintain them under different laws and pretenses, suggesting that this saga is far from over.
Confidence in Our Approach
While we have highlighted some excesses in today’s markets and pressure points in the economy, the reality is there has not been a single moment in market history when investors did not have plenty to fret over. Thus, while we think it is as important as ever to focus on capital protection and challenge conventional wisdom when conditions call for it, we have also learned never to overlook the incredible dynamism of the U.S. economy. Our team’s success is owed largely to the remarkable businesses that our clients own shares of, many of which have become multi-generational holdings. We remain confident in our ability to identify the leading franchises of tomorrow and to build portfolios that serve our clients dependably over a lifetime.
The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.
