Rebalancing Portfolios is a Key Strategy for Individuals 

 

The past year has brought a mix of strong market performance, shifting economic policy and rising operating costs. Many investors and business owners are entering the new year with practical questions. How sustainable are the recent gains. What effect will rate cuts have on the markets. How will AI continue to influence both performance and daily operations. And what planning steps make sense as new provisions of the One Big Beautiful Bill take effect in 2026. 

The goal of this outlook is to provide a clear and steady view of the environment ahead. Market trends, sector behavior and tax changes are creating both opportunities and areas that call for additional attention. Understanding these dynamics can help investors and business owners make informed decisions as they prepare for the coming year. 

Outlook for the Rest of 2025 

The fourth quarter is historically a strong period in the equity markets, and that should continue in 2025. The markets have been relatively calm with little volatility, and this is the season when investors need to think about how to prepare for tax season. This is a good time to focus on tax loss harvesting to minimize capital gains exposure, as well as rebalance portfolios for optimal asset allocation. 

Nationwide, investors have focused their equity positions heavily in the S&P 500 this year, as well as in the “Magnificent Seven” — seven technology stocks that have averaged 58% returns since the beginning of 2024. These include: 

  • Alphabet (Google) 
  • Amazon 
  • Apple 
  • Meta (Facebook) 
  • Microsoft 
  • Nvidia  
  • Tesla 

Indications are that many investors will defer capital gains taxes on these and other big winners into Q1 2026, to avoid a big hit from capital gains on their 2025 tax returns. But it would be advisable for clients to reduce those positions in 2026 and spread out their investments among other asset classes. The broader markets will outperform the heavy hitters, and some of them are becoming overvalued. De-emphasizing these major technology stocks and spreading investments among broader asset classes would be a good focus for rebalancing a portfolio and minimizing concentration. 

Selling strong performers that are at the top of their industries and taking the profits now is counterintuitive to many investors. But allowing your portfolio to become too concentrated in any asset class — no matter how well the stocks are performing — creates risk that most investors want to avoid. Talk to your investment advisor about how to balance your portfolio so you can enjoy some of the profits you have earned, yet still spread your investments out among other asset classes and reduce your overall risk. 

Despite a fair amount of unease about the economy, it is doing fine and still growing at 1.5%. The Fed cut its benchmark interest rate by 25 basis points in September and again in October, and announced that it would end the reduction of its asset purchases — known as quantitative tightening — on Dec. 1, 2025. While Fed Chairman Jerome Powell discouraged expectations of another rate cut when the Fed meets in December, he previously suggested another rate cut may be considered in Q1 2026. 

It’s important to note that Chairman Powell will reach the end of his term on May 15, 2026, and his replacement may have a significantly different approach to interest rates and balancing the economy than he does.  

When there is another interest rate cut, investors would do well to shift their investments to the financial sector and, possibly, the energy sector. Health care and pharmaceuticals could be poised for some short-term gains as well as long-term growth, as valuations are down and prices are lower, reflecting recent lackluster performance. 

That being said, we anticipate some volatility in the first half of 2026. Certain key valuations are high right now and vulnerable to a correction. Next year will not likely see 20% growth in stock values like we saw this year, but we can expect muted gains. 

When you have a year with strong performance in the equity side of portfolios, it’s easy to get used to it and consider it the norm. It’s not, so investors need to reset their expectations going into 2026. 

What Should Investors Do? 

  • Rebalance your portfolio, broaden out your sector concentration and review any over-weights you may have. Know what you own, and be diligent about reviewing your portfolio’s performance. Consult with your Adams Brown Wealth Advisor about next steps. 
  • Shift some investments from technology to other sectors for growth assets. 
  • Increasing international equity exposure to around 20% of the overall portfolio may better position you for the opportunities and risks anticipated in the 2026 financial landscape. 
  • Watch interest rates. The Fed is expected to lower rates in the first half of 2026, which will be good for smaller companies. There are some great smaller company stocks that are undervalued and present a good opportunity for investors. 
  • Pay attention to utility stocks. The rapid growth of AI requires new data centers, which are constantly under construction these days and will require massive amounts of energy when they are operational. Utility company stocks could rapidly rise in value as their financial performance reflects increased demand for their power. 
  • Watch the bond market. Bonds perform well when interest rates go down, and we expect good performance in 5- to 7-year maturity mid-range bonds. The tax-free income on instruments like municipal bonds and state bonds is attractive in this environment. Additionally, the rates we have seen on money markets have been good. 

How Will Small and Middle-Market Businesses Fare in 2026? 

With inflation still hovering around 3%, businesses are seeing increasing costs of goods and services, and owners must make decisions on whether to absorb those added costs or pass them along to customers. If you absorb them, you may retain customers, but the damage to your bottom line could put your business in a precarious position. If you pass the costs on to customers, you may lose sales — and still put your company in a precarious position.  

There are no easy answers. 

We expect to see profit margins tighten in 2026 across industries due to those higher input costs. Business owners would do well to identify areas where costs can be cut and new efficiencies implemented, including workforce reductions and use of artificial intelligence (AI) tools to effect efficiencies. 

Impact of AI 

It would be hard to look ahead to 2026 without mentioning the impact AI is having across all industries. AI is making businesses more efficient at many levels. Amazon and UPS recently announced layoffs of a combined 15,000 employees due to efficiencies reached through the use of AI. This is bad for the employees, obviously, but it is good for companies that can become more efficient and cut costs. 

The impact of AI on the American workforce is a discussion for another day. But for now, AI is transforming companies, making them more efficient and profitable, and is fueling the stock market. 

In 2026, AI will become even more embedded in what we do and the technology we use every day, it will add efficiency and decrease costs for both businesses and consumers. To that degree, it will become a pivotal factor in driving the economy. 

AI may not be as big as the internet or the cell phone in terms of impact on American households, businesses and the economy. But it’s certainly in the same conversation. 

How Does the OBBB Factor In? 

The OBBB, the massive tax bill enacted in July 2025, may change the way many individual taxpayers prepare for 2026. Regardless of the direction the broader economy takes the country, there are key strategies that individuals should consider for their personal economic situations. 

Following are several actions or considerations taxpayers should be aware of due to changes in the OBBB. 

  • Review your estate plan. With the new permanent estate tax exemption of $15 million per individual ($30 million for married couples filing jointly), this is a great time for gifting assets to your heirs. Moreover, gifting may be essential to ensure your overall estate remains below the exemption levels. 
  • Review your charitable giving before the end of the year. Starting in 2026, the OBBB imposes a 0.5% floor for charitable deductions for individuals who itemize. This means charitable contributions can be deducted only if they exceed 0.5% of the taxpayer’s adjusted gross income. 
  • Speaking of charitable contributions, consider making a Qualified Charitable Distribution, which allows individuals who are 70½ or older to make a tax-free donation directly from a traditional IRA to a qualified charity. This helps satisfy your required minimum distribution (RMD) requirement, but the distribution is tax free since it goes to a qualified charity. 
  • As you may have heard, there is a new temporary $6,500 tax deduction for senior taxpayers. However, it starts phasing out at $150,000 AGI for couples. 
  • Consider a Roth conversion, which comes with a deduction between now and 2028. 
  • Max out contributions to your 401(k) or other retirement plans. 
Questions? 

The economy in 2026 may cool down a bit from what we have seen in 2025, but with strategic investment portfolio management and, for business owners, cost cutting to achieve efficiencies, the year should be a strong one. A lot will depend on your tax situation, so it’s essential to consult with your tax advisor. 

If you would like to discuss changes in your investment portfolio, your estate or your business to align with the economic opportunities that 2026 will bring, contact an Adams Brown wealth advisor.  

 

About Adams Brown Wealth Consultants

Adams Brown Wealth Consultants is a nationally recognized financial advisory firm delivering holistic wealth management solutions for individuals, families and business owners. As a division of Adams Brown, a top CPA firm, the team integrates tax strategy, financial planning, estate planning, insurance and risk management and retirement plans into a seamless experience. As a fiduciary, the firm operates under a fee-based model and is committed to providing objective, client-first advice. At Adams Brown Wealth we go above+beyond® for our clients, acting as true strategic allies dedicated to supporting their growth at every stage of their journey.