The market moved to a more defensive posture and yields declined as rate cut expectations rose.

December retail sales showed clear signs of cooling after months of resilience amid a turbulent economic backdrop. The latest report showed sales were flat month over month, falling short of expectations for 0.4% growth and marking a sharp deceleration from November’s robust 0.6% increase. Weakness was concentrated in discretionary categories such as furniture, apparel, and electronics, while spending proved more resilient in necessities and home related materials. Soft auto spending was also a key contributor to December’s flat reading. Together, these trends suggest that the effects of tariffs and a softening labor market are beginning to filter through to consumer behavior, raising concerns that households may be approaching the limits of their spending capacity.

Investors rotated into more defensive, value sectors and drove up the price of gold.

Midway through 4Q25 earnings, the aggregate earnings growth rate stands at 13.9%, meaningfully higher than estimates from the start of the period. If this pace continues, it would represent the fifth consecutive quarter of double-digit earnings growth, a clear testament to the strength of the bull market. Thus far, 72% of companies have reported positive earnings, while 80% have posted positive sales growth. In addition, 81% of companies have surprised the market with positive earnings, providing another indication of broad-based strength. Industrials, technology, and financials have led, while consumer discretionary and real estate have continued to lag.

In addition, President Trump nominated former Fed governor Kevin Warsh to succeed Jay Powell.

U.S. Treasury yields are back in the spotlight as a mix of tariff threats, geopolitical tensions, and rising policy uncertainty have pushed borrowing costs higher. Last week, the 10-year Treasury yield climbed to 4.30% during a sharp move away from risk, while 30-year yields rose to 4.95%, threatening to surpass the 5% threshold for the first time since July 2025. These yield moves, tied to escalating U.S.-Europe trade tensions and Japan's fiscal crisis, have raised fears of a broader "sell America" trade.

With the economy remaining strong, the forecasts for 2026 rate cuts fell.

In 2025, the U.S. economy has shown resilience despite challenges from government policies.

Despite significant market volatility and policy shifts, the U.S. economy enters a new paradigm with a solid foundation.

With 4Q24 earnings on track to grow 17%, and 10 out of 11 sectors delivering positive performance, our portfolios are currently in base positioning.