As we step into 2026, this is a perfect time to reflect, reassess, and refocus on your financial goals. Each new year brings its own set of challenges and opportunities, and this year is no exception. After three straight years of double-digit returns for the S&P 500, we enter the fourth year mindful of stretched valuations in some areas. That said, investors have good reasons for optimism, including a supportive regulatory environment that encourages innovation and long-term growth, broadening corporate earnings, and ongoing advancements in AI. The 2025 tax legislation, combined with the Federal Reserve’s resumed rate cuts, is delivering fresh economic stimulus. While uncertainty around trade policies may linger, it could also create new avenues for growth. Encouragingly, this positive momentum is spreading beyond just large-cap stocks.
At Cardinal Capital, we’ve always believed in keeping things straightforward: investing in strong companies at fair prices and maintaining diversification to handle any market twists and turns. By sticking to proven principles rather than chasing headlines, we keep your portfolio on track toward your long-term objectives. Our neutral, apolitical stance helps us avoid hype-driven decisions, focusing instead on what really matters—solid businesses, attractive valuations, and broad diversification.
We’re particularly enthusiastic about the prospects for overlooked small- and mid-cap companies to step into the spotlight. While the S&P 500—and especially AI giants—have grabbed most of the attention, true value often hides in small- and mid-caps. These companies may lack the brand recognition of blue chips, but they’re also under the radar of big Wall Street firms and index funds, opening the door to discovering undervalued treasures. Like small caps, mid-caps have lagged over the past five years, yet they’re typically more financially solid than smaller peers. Both groups tend to thrive when big-company prices get inflated and spark investor concerns about valuations. Sure, risks such as a recession or trade issues could impact them as much as giants, but they seem less exposed in other ways—for example, the S&P 500 is lopsided, with just 10 stocks accounting for 36% of the index, and tech makes up half its weight. In a market flooded with cash chasing a few pricey favorites, it’s smart to look at what’s been overlooked, and that’s where small- and mid-caps hold real promises.
A great illustration from our portfolio is Argan (AGX), a top performer in our small- and mid-cap holdings last year. Argan is an engineering and construction company specializing in power plant and infrastructure projects, including efficient natural gas facilities, solar and wind farms, and other energy projects. What draws us to Argan is its strong lineup of upcoming projects for reliable income, a healthy balance sheet with little debt and plenty of cash, proven leadership that delivers on time, and its smart role in the shift to cleaner energy—all at prices that look reasonable next to overhyped tech plays. Unlike the “Magnificent 7” or AI stars that steal the headlines, Argan steadily builds real-world value by supporting the infrastructure that powers our economy.
January sometimes kicks off with the “January effect,” where small-cap stocks have historically outperformed. Though it’s not as reliable these days, it’s a nudge toward the upside potential when smaller firms get their moment. No matter the calendar, we stay laser-focused on spotting companies with solid fundamentals at sensible prices.
Looking at opportunities abroad, non-U.S. equities outperformed U.S. indexes in 2025. Many international markets offer stocks at much lower valuations than their U.S. counterparts, which are often priced as if everything will go perfectly. For example, in Europe and Japan, companies are benefiting from improving economies, lower interest rates, and their own tech and innovation booms—without the extreme hype. This creates an opportunity for higher growth at reasonable prices, adding diversification that can help protect against U.S.-specific risks such as policy shifts or sector concentration. While currency fluctuations and geopolitical issues remain obstacles, a balanced allocation here could boost returns in a globally connected world.
Also, bonds remain essential for reducing portfolio volatility while delivering steady income, solidifying their place in well-rounded strategies.
Overall, we’re optimistic about both U.S. and international equities, buoyed by policy tailwinds, but we know markets can get bumpy as changes roll out. The best approach? Stay invested in a diversified mix and be ready for short-term dips; that’s how we build lasting growth.
We’re here to navigate these shifts with you and keep your investments on a steady path. If you’d like to chat about your strategy or have questions, reach out.
Wishing you and your family a happy, healthy, and prosperous 2026!
