Signal vs. Noise: Markets, Misconceptions, and the Case for Optimization in 2026

• Gold returned 64% in 2025, vastly outperforming Bitcoin (-6%) and establishing itself as a more reliable portfolio diversifier despite questions about the sustainability of such gains.
• The Fed cut rates 75 basis points, but long-term yields remained elevated (10-year at 4.18%) as investors demanded compensation for inflation risk and fiscal uncertainty, steeping the yield curve.
• AI capital expenditure reached $360 billion in 2025 with projections of $3-5 trillion over five years, but rapid depreciation (processing power improved 30x in four years) poses significant risk to debt-financed infrastructure.
• International market correlations with the U.S. fell to healthier levels (developed markets ~0.7, China ~0.2), while private equity returns are converging toward public markets as capital inflows reduce the illiquidity premium.

Market Summary: Signal vs. Noise in 2025 and 2026 Outlook

Key Performance Metrics

2025 delivered strong returns across asset classes: global markets gained 22%, S&P 500 returned 17.8%, while international equities outperformed the U.S. by over 14%. All major asset classes exceeded cash returns. Gold was the standout performer with 64% annual returns and 11.7% in Q4. The U.S. dollar declined 9.4%, and U.S. Aggregate Bonds returned approximately 7%.

Market Developments

The Federal Reserve cut rates 75 basis points in 2025. The 2-year Treasury yield fell 78 bps while the 10-year ended at 4.18% (down 40 bps), creating a steepening yield curve. Emerging market debt delivered roughly 14% returns, significantly outperforming other fixed income.

Key Themes

Diversification Benefits: Market correlations normalized, with developed markets and China showing 0.7 and 0.2 correlation to the U.S., respectively. International value massively outperformed growth, particularly in Europe and Japan.

AI Investment Risks: Capital expenditures reached $360 billion in 2025, projected to hit $3-5 trillion over five years. Rapid processing power improvements (30x in four years) create depreciation risks for existing infrastructure. Market concentration in large U.S. tech presents portfolio risk.

Private Market Convergence: Heavy capital inflows into private equity are reducing return premiums, with performance converging toward public market levels as the illiquidity premium shrinks.

2026 Outlook

Expectations include modest inflation increase from tariffs and dollar weakness, slower growth without recession, and continued global market gains with higher dispersion. Gold will likely experience volatility, and bond returns will show greater differentiation than 2025's narrow 4-8% range. Two of three assets—Value, Small Cap, or Emerging Markets—are expected to perform well.

The analysis emphasizes optimization and global diversification over single-outcome betting as easy post-pandemic returns have been exhausted.