Over many years, traditional portfolio construction—such as a diversified mix of stocks and bonds both domestically and internationally—has gradually lost favor. This shift comes from standout performers dominating the landscape: stocks consistently outperforming bonds, growth surpassing value, and U.S. equities leading over their global counterparts. As a result, many investors today might find themselves less diversified. Yet while traditional diversified portfolios may feel somewhat out of vogue right now, it is more essential than ever to navigate uncertainty and achieve long-term goals.
When thinking about how to get back “onside” with portfolio construction in 2026, we encourage clients to reflect on your core objectives: Are you prioritizing steady income, capital preservation, or growth? How comfortable are you with market volatility, or do you prefer a more conservative path? And is liquidity a concern? These questions guide our allocation decisions, ensuring your portfolio aligns with goals and risk tolerance.
In equities, strong earnings growth from the Magnificent 7 over the past three years has extended an already robust period of outperformance. Despite strong fundamentals, high-quality companies defined by higher levels of profitability, reasonable levels of debt, and stable earnings growth lagged the broader market in 2025. Investors instead gravitated toward firms touting transformational technologies, even though many were unprofitable and, in some cases, generated no revenue. Recently, we have seen the bloom come off the rose for some of these unprofitable momentum companies, as their share prices have dropped at the start of the year.
Of course, many of the large tech companies investing heavily in AI (Google and Microsoft, both long-term Cardinal portfolio holdings) are among the world’s fundamentally sound businesses. Our discipline is to remain invested in businesses with earnings power, balance-sheet resilience, and competitive moats for sustainable growth, while avoiding speculative, momentum-driven trends that boosted market indexes last year. Cardinal also avoids concentration risk, which could undermine long-term financial stability.
Looking forward, corporate earnings growth is expected to broaden, creating a more stable foundation for more evenly distributed market advances. Sectors such as industrials, materials, and financials are positioned to participate, and Cardinal Capital maintains exposure across each. For instance, Siemens and Cummins enhance data center and power grid reliability; BASF and DuPont advance sustainable materials essential for electric vehicles and modern technology; JPMorgan and regional banks provide critical financing; and Microsoft excels in software and cloud platforms. In short, a well-diversified portfolio across these high-quality names is key to seizing the potential ahead.
Turning to fixed income, high-quality bonds continue to offer attractive income opportunities, supported by strong corporate fundamentals, making them an excellent complement to equities in a diversified strategy. Selectivity is crucial, and if inflation rises, locking in competitive real yields can serve as effective diversification. By combining short-dated securities with targeted intermediates, we maintain flexibility to adjust amid potential pauses in rate cuts or unexpected hikes. Overall, fixed income plays a key role in enhancing portfolio balance and resilience.
Whether it’s a bubble or a boom in valuations, profits, or innovation, selectivity and balance are essential for effective portfolio management. We are mindful of the risks ahead. Factors such as election-year dynamics, narrow market leadership, and elevated valuations require a disciplined approach. These uncertainties highlight the importance of maintaining quality bias and prioritizing sectors and companies with solid fundamentals and robust long-term growth potential.
Finally, we’re pleased to share that Cardinal closed last year with more than $1 billion in assets under management, a significant milestone that reflects our shared success. We sincerely thank you for your continued support and confidence, which have fueled strong, risk-adjusted growth for your investments and our firm. Please contact us if you’d like to schedule a portfolio review and discuss how we can further tailor our strategies to your needs.
