Welcome to our twenty twenty six first quarter market update with Scott Zelniker. Alongside our usual conversations on money, mindset and building long term wealth. We take a step back each quarter to look at what's happening in the markets, what trends are shaping the economy, and what investors should be paying attention to in the months ahead. I'm Joleen Tepedino, team business manager for the Dorfman Car and Heritage Group and host of today's show. Let's get right into it. Scott, thanks for joining me today. Sure, Jolie, it's great to kick off the new year. Absolutely, Scott, looking back, what were the dominant themes in twenty twenty five and how have they shaped investor sentiment heading into twenty twenty six? Oof the dominant themes. Uncertainty around geopolitical events. That's what I would call it. Twenty five was was a great year in the markets with mid double digit returns in the S&P for the third year in a row.
But we had that big shock in April that took the markets down almost twenty percent in a two week period. But what started to come to fruition is what we've been talking about for a while. The major themes the technology revolution, the new chapter of AI, increased productivity because of all that deregulation, favorable tax treatment. I would say twenty twenty five was defined by rate stabilization and AI driven growth. Scott, it's twenty twenty six. Still a tech driven market or are we seeing a shift towards other sectors? I think what you're going to start to see this year, you're still going to see the AI trade? I think we're still early in that game. There's still a lot of expansion there. We have pretty large gains in the AI focused stocks. So we're not going to just look to get out of them. But what you're going to see is you're going to see the rest of the market catch up. I think you're going to see companies start to benefit from the efficiencies of AI. So instead of just being a tech driven rally, I think you're going to get some rotation into some health care, industrials, energy infrastructure. So you know we do still see a positive backdrop. But the tech will be comfortably in there. But I don't know that I would call it dominance for next year. And the million dollar question that everyone wants to know, Scott, what are your expectations for volatility in twenty twenty six and what factors could drive market swings? So for twenty twenty six, I'm glad you didn't ask me my expectations for returns, because anyone that gives you an answer to that is just making it up. If you really held me to it, I would say you're probably looking at the market that'll come in by the end of the year. With volatility in the middle between down five and plus five. Now, I don't say that as any groundbreaking news here. I said the same thing going into last year. Why do I say that. We've had these three terrific years in a row. Markets don't go straight up. We all know that. So for a market to be up a few percent or even down a few percent, I don't think would be abnormal.
When you ask the question about expectations for volatility, I do expect a lot of volatility. There's geopolitical risks. We're likely going to get an earnings surprise in the tech sector. They're priced for perfection. So surprise might not even be terribly negative. Maybe just not living up to the hype. So when we look through history, we know that on average, there's at least one ten percent pullback per year in the S&P five hundred. And statistically we know there's at least two five percent pullbacks. So volatility yeah we expect volatility. But here's the thing. The market never does what people expect. Although we see volatility and we're prepared for it. Who knows right. But we are definitely prepared for it. We're going to use opportunities for pullbacks geopolitical risks earnings surprises. We'll use that as opportunities to add to positions. How should investors think about diversification when they have embedded gains in concentrated positions. So that's a great question. With the markets being as strong as they've been the last few years. You know it's not what you earn. It's what you keep. There's a big challenge in rebalancing positions and getting your your performance in line versus what do you keep in your pocket after paying taxes. So what we've been doing for a lot of clients and we'll continue to do is Utilizing our clients IRAs, where they have large ones, to to really create more balance across their whole household. Reduce positions in some of the higher flyers that have given us the gains, and redeploy that money. We want to think about charitable giving. Exchange funds and really just kind of gradual trimming of positions. And then we want to diversify into some non-correlated asset classes. The S&P five hundred is market cap weighted, meaning the larger the the size of the company, the bigger the weighting in the S&P five hundred.
So by default, given what we've seen in the market, it's the S&P five hundred is very heavily weighted into technology. So a nice compliment that we do have in most of our portfolios is equally weighted S&P five hundred ETFs which will complement the tech portion of the portfolio. Scott, what opportunities or risks should investors keep on their radar for the first half of twenty twenty six? Well, opportunities that we've been talking about is power. Power companies to really be the backbone of AI. The equipment makers think about companies that make the equipment to make semiconductors. There's opportunities there. The big risks inflation. If inflation comes back into the market and the fed has to, you know, change their direction on rates, that would be a problem. Geopolitical shocks. I mean we see those almost every day and the markets. It's really funny right. Things that used to drive the market down pretty dramatically. They kind of get shrugged off now by the markets. And then of course there's the risks we don't see, because risks we all see are usually priced into the markets. It's the risks we don't see. And the best way to be prepared for that is to have some cash, which gives you the opportunity to invest, because we don't want to have to make decisions in a bad market. What do I mean by that? If we own a second tier company that's not earning money in their balance sheet isn't pristine. When the market goes down and the stock goes from one hundred to fifty, you have to make a decision.
Do I sell it or do I hold it? And then, inevitably, I've been in this business long enough to know we'll make the wrong decision. If we sell it, it'll go back up. If we hold it, it'll go down. If you own a pristine balance sheet, some of the top companies in the world. When the markets go down or they have an earnings miss and the stock goes down, you don't have to make a decision. You're able to stay with the position. And what our clients have seen over the years here is really by staying nimble, focusing on quality balance sheets, having dividend payers for cashflow, you know, really being positioned in such a way where we own the best of the best over the long term. You tend to make a lot of money over time. That wraps up our first self equity market update of twenty twenty six. This year is shaping up to be a year of opportunity, but also complexity. Stay informed, stay diversified, and remember long term discipline beats short term noise. Thanks for tuning in and please give the page a follow for more incredible stories to come. This podcast is presented for informational purposes only, and should not be relied upon as investment advice or the basis for making any investment decisions. It does not constitute an offer to sell or a solicitation of an offer to buy any specific product or service. UBS does not provide legal or tax advice, and we would recommend listeners to obtain appropriate, independent professional advice. Some of the views and opinions expressed may not be those of UBS Group AG or its affiliates. UBS Financial Services, Inc. offers investment advisory services in its capacity as an SEC registered investment advisor, and brokerage services in its capacity as an SEC registered broker dealer. These services are separate and distinct, differ in material ways, and are governed by different laws and separate arrangements. It is important that you understand the ways in which we conduct business, and that you carefully read the agreements and disclosures that we provide about the products or services we offer. For more information, please review client relationship summary provided at UBS. Summary UBS Financial Services, Inc. is a subsidiary of UBS Group AG and is a member of Finra and SIPC.