Newsletter and Quarterly Update December 2025

Happy New Year from the Northwest!

As I write this on the first day of 2026, I'm gazing out at a classic damp, dreary Pacific Northwest afternoon – darkness falling not long after 4 PM. Despite the gloom, I'm reminded that the earth's steady cycle will soon bring longer, brighter days and the promise of another summer. The change starts subtly, but it always arrives, offering hope and a reliable foundation for planning.

The markets we invest in, of course, lack such predictable regularity. Timing buys and sells requires analysis, strategy, intuition, decisiveness – and yes, some luck. Heading into 2025, we expressed cautious optimism for renewed economic traction to support an aging bull market, and the year delivered: strong stock market returns (with the S&P 500 up around 16%), continued economic growth, and resilient corporate performance, all against a backdrop of geopolitical tensions and cultural debates.

Our disciplined focus on superior value across diversified assets and classes proved effective once again. Client portfolios delivered competitive returns with lower volatility than broad indexes – protecting capital while participating in the upside.

Now, as this mature bull market persists (bulls rarely end amid growing economies), valuations in many areas appear “priced to perfection.” This setup can amplify volatility, especially for companies missing earnings expectations. Navigating it thoughtfully is core to what we do – and I'm confident Patrick will offer valuable perspective below.
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Since founding Cairn Investment Group in 2007 (building upon decades of prior experience serving many of your families with Jim Parr and Don Parr), our primary distinction has been expert investing and portfolio management. In recent years, we've expanded significant capabilities in financial planning and comprehensive wealth management. To better reflect this full scope and clarify our services, we're excited to evolve our brand to Cairn Wealth Management. Expect a fresh logo, website, and overall look in the first half of  2026 – we may even share a few options for your feedback if choices are close!

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​Our disciplined focus… proved effective once again. Client portfolios delivered competitive returns with lower volatility than broad indexes – protecting capital while participating in the upside.”

—Tim Mosier

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Patrick's Perspective

Global equity markets delivered strong returns in 2025, despite a long list of macro headwinds that persisted throughout the year. If you had asked me a year ago whether portfolios could post double-digit gains, I would have said that was a low probability outcome. Inflation remained elevated, global trade tensions were rising, labor market conditions were softening, and most U.S. companies – outside of the AI hyperscalers – were delivering fairly mediocre results at historically expensive valuations.
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And yet, that’s exactly what happened. It’s a good reminder that markets don’t always behave the way we expect them to. Just because we think outcome “B” should follow event “A” doesn’t mean it will. That uncertainty is precisely why we emphasize a data-driven approach – one that helps strip out the noise and emotion from portfolio decisions. Over time, that discipline is what matters most, whether markets are moving higher or pulling back.

As the year progressed, the most common question we heard from clients was, “Are U.S. stocks in a bubble?” My initial response has been a pretty clear “Yes.” That said, when we step back and rely on data and market history, it’s important to acknowledge that the term “bubble” is broad and can mean very different things to different investors. It would be far too blunt an instrument to apply that label to all U.S. assets – or global markets more broadly, as indicated by a quick view of valuation ratios of U.S. stocks versus international stocks.

That brings me back to one of the best definitions of how bubbles form, from
investor Dr. John Hussman:

“Bubbles are generated when investors drive valuations higher without simultaneously adjusting their expectations for future returns lower. That is, investors extrapolate past returns based on price behavior, even though the resulting expectations about future returns are inconsistent with the returns that would equate price with discounted cash flows.”

Viewed through that lens, it’s hard to argue that large-cap U.S. technology stocks don’t fit this definition. The S&P 500 technology sector – now accounting for more than 30% of the index – is trading near all-time highs at close to 10x revenues (see chart below), while analysts continue to expect price appreciation of more than 20% over the next year. That combination of elevated valuations and optimistic expectations is precisely what Dr. Hussman is describing.

We’ve talked at length over the years about valuations and how excessive valuations tend to lead to lower long-term returns. Where you start matters. The starting point of an investment plays a significant role in determining where you are in the market cycle and, ultimately, the returns you experience. While U.S. stocks have averaged roughly 10% annual returns over the long run, the path to those returns has varied considerably. There have been many periods that exceeded that average, and many rolling 10-year periods that fell well short.

Simply put, the price you pay for an asset – whether it’s a stock, a bond, or a piece of real estate – matters.
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That’s why our focus remains on areas of the market that are not trading at such lofty valuations, where expectations for the future are more reasonable or, in some cases, underappreciated by market participants. This includes a small group of undervalued U.S. companies that meet our strict quality and valuation criteria, as well as select international markets. While U.S. markets have received much of the attention for reaching new all-time highs, it’s important to note that international markets fared better than U.S. markets in 2025. Our overweight to international stocks benefited portfolios and was a meaningful contributor to overall returns, even alongside a higher-than-normal cash allocation.

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Simply put, the price you pay for an asset – whether it’s a stock, a bond, or a piece of real estate – matters.
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That’s why our focus remains on areas of the market that are not trading at such lofty valuations, where expectations for the future are more reasonable or, in some cases, underappreciated by market participants.”

—Patrick Mason

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Broad market sentiment and expectations for equity returns remain elevated. With household equity allocations near historical highs and most investors expecting further gains in 2026, there is very little room for disappointment should market conditions change.

Fixed Income

We continue to view U.S. Treasuries and municipal bonds as the most attractive areas within fixed income. Our focus remains on shorter-term maturities for individual Treasury bonds. We currently have no exposure to corporate bonds, as yields in both investment-grade and high-yield credit do not adequately compensate investors for the additional credit risk when compared to comparable-maturity Treasury bonds.

Economy

We continue to view the economy as being in the late innings of the expansion and increasingly fragile, caught in a tug-of-war between elevated inflation and slowing job growth. This places the Federal Reserve in a particularly difficult position when setting monetary policy.

Year-over-year payroll growth continues to trend lower, reaching levels that have historically preceded recessions. At the same time, inflation measures – across both hard data and surveys – remain well above what consumers and businesses experienced in the years following the Global Financial Crisis. While the rate of inflation has slowed meaningfully since the pandemic, the cumulative five-year increase in prices, as measured by CPI, is now roughly 25%, the highest since the late 1980s, when inflation was still running north of 5%.
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Looking ahead, many economists expect inflationary pressures to reaccelerate in 2026 as fewer companies absorb the costs of tariffs and instead pass them along to consumers. As a reminder, we are not in the business of predicting recessions, nor is that a part of our investment process. However, understanding where we are in the economic cycle helps provide context as market data evolves in response to these developments.

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We continue to view the economy as being in the late innings of the expansion and increasingly fragile, caught in a tug-of-war between elevated inflation and slowing job growth.”

—Patrick Mason

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Final Thoughts

Given the backdrop of elevated valuations across many asset classes and increasingly frothy investor sentiment, return expectations heading into 2026 should be lower than the double-digit returns portfolios experienced in 2025. We continue to view international markets as more attractive than U.S. markets, given their lower valuations and more favorable conditions.

Our exposure to U.S. equities is focused on companies and sectors where we see a meaningful margin of safety between current prices and our estimate of fair value. This provides the opportunity for upside while offering greater downside protection than more expensive areas of the market, should equities falter. When suitable opportunities are limited, we are comfortable maintaining a higher-than-normal cash allocation, invested in interest-paying money markets and Treasury bills, earning competitive yields while we wait for better opportunities to emerge.
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Thank you, as always, for your continued trust and support. Please don’t hesitate to reach out with any questions or comments. —Patrick Mason

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Thank you!

Thank you all for your continued trust. We remain committed to earning it every day.
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​Happy Trails,
​Tim Mosier, President
​Cairn Investment Group, Inc.

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As a reminder, we are not in the business of predicting recessions, nor is that a part of our investment process. However, understanding where we are in the economic cycle helps provide context as market data evolves in response to these developments.”

—Patrick Mason

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