Happy New Year from WealthSouth! The year 2025 brought about massive change and subsequently unknown consequences in the market and our nation. There was change in our Administration, the Senate majority, our approach to tariffs, government employment (DOGE), AI (Artificial Intelligence), and finally, in investment market leadership.

The increase in uncertainty, particularly regarding policy changes, led to an imbalanced year with two significant downturns. The first being a major selloff in April after Liberation Day tariff announcements (-19%) and then in an AI-related selloff (-8%) in November. Both selloffs presented opportunities as markets snapped back within less than a month. Outside of gold, international equity markets led the way, up 30%, outpacing both the S&P 500 and the technology-heavy NASDAQ. Even if you consider the decline in the dollar, international equities had the performance edge, overall. This change is significant in that US large cap markets, specifically AI-related technology stocks, have driven 78% of price returns since November 2022 (Source: JP Morgan) and dominated all major equity indices. In terms of economic sectors, we saw significant shifts as Health Care, Industrial, Utility and Financial companies started to show signs of life after five years of lackluster comparative returns.

From an investment perspective, we see the broadening market leadership as a positive turn of events. The potential new cycle shows strength across distinct parts of our economy and the reliance on just a handful of stocks propelling the market is starting to wane. Despite the market’s notorious dislike of uncertainty, patient and disciplined investors were again rewarded in 2025, with well-above-average stock and bond returns. Balanced portfolios produced another double-digit year of returns, capping a strong three-year run off the bottom of the markets in 2022.

Considering the change and uncertainty, we have stayed neutral in our overall asset allocation versus client targets. Below we have highlighted some of the more significant shifts WealthSouth made during the past year:

• Reduced cash positions as rates declined
• Locked up higher yields across the yield curve at the apparent highs in the rate cycle
• Continued taking profits in over-valued equities
• Added to International equity positions
• Added to US Equity sectors where valuations remained attractive

Our anticipation is for several current economic themes in the new year to continue. With Jerome Powell’s term expiring in May and the likely prospect of a new dovish Federal Reserve president, we expect the Fed to continue cutting rates in 2026, moving us closer to their long-run neutral rate of 3%. Despite expectations for a lower Federal Funds rate, longer duration bond yields appear to be range-bound due to increased Treasury issuance and lower international demand. Higher starting yields give us a strong platform for the continuation of above-average bond returns in the coming years.

Inflation will likely continue to rise in the early part of the year due to higher-than-average income tax refunds and delayed tariff impacts, then revert to closer to 2% by year-end as the benefits of lower gasoline prices kick in. We anticipate another double-digit increase in company earnings per share growth (the lifeblood of stock returns) along with productivity growth, business tax cuts and tempered limited wage increases. AI spending on infrastructure, coupled with consumer spending (particularly higher income households), continue to support solid GDP growth in the 2-3% range. While unemployment has crept up in 2025 due to slower job gains, we believe lower immigration may suppress the overall impact.

On reflection of 2025, we recognize the diverse group of individuals, trusts, families, businesses, and non-profits for whom we manage assets. This diversity across our client base results in different individual objectives, goals, tax situations, and cash flow needs. We highlight this fact as the changes this past year impacted everyone somewhat differently, depending on those disparate needs. A contemporary example is the rapid rise in interest rates we have experienced since 2022. For those clients in retirement with fixed incomes, the rise in rates over the past few years has afforded them the ability to lock up favorable higher yields at far lower risk levels. Conversely, for the business owner looking for a loan, or the newly married couple needing their first mortgage, the rise in rates has not been quite as welcome!

Given these differences, we do not have a one-size fits all strategy. Rather, we construct customized portfolios with personalized investment policy statements that accentuate the many nuances we encounter. Please don’t hesitate to share your individual financial landscape with us in the New Year!

As always, we appreciate your support and trust in WealthSouth and look forward to meeting with you in our new offices, located conveniently in downtown Lexington on Main Street opposite Carson’s restaurant.