I have two portfolios: (a) long-term, diversified, low-cost ETFs, and (b) collecting diamonds in front of bulldozers, short-term option plays, and some individual stocks I find interesting. Here, we will only look at (a). This essay is structured along five themes I believe to be true for 2026:

(1) Market Concentration and High Valuations
(2) US Dollar Depreciation Expected Despite Continued Dominance
(3) AI Investment Remains Central But Requires Scrutiny
(4) European Fiscal Revolution Creates Investment Opportunities
(5) Fixed Income Offers Best Prospects Since Global Financial Crisis

Let’s start with the conclusion. Here’s how I will rebalance my portfolio going into 2026: 2026 portfolio allocation composite showing asset class breakdown: 28% US Equities, 18% Europe, 12% Asia EM, 14% Fixed Income, 5% Gold, 4.5% Crypto 2026 portfolio allocation composite showing asset class breakdown: 28% US Equities, 18% Europe, 12% Asia EM, 14% Fixed Income, 5% Gold, 4.5% Crypto What changed and why?: US Equities (-10%): S&P 500 valuations at 23× forward P/E reflect peak optimism; Nasdaq’s 30× trailing P/E is unsustainable. I reduce large-cap exposure from 33% to 23% to avoid dual headwinds: equity mean reversion and USD depreciation. I redeploy 5% into US small-cap stocks, which offer better valuations and risk-adjusted returns. Europe (+5%): European equities trade at a 22% discount to global peers and benefit from Germany’s €1T+ infrastructure commitment and structural reforms. This compounds three tailwinds: improving fundamentals, valuation re-rating, and EUR stability vs CHF. I increase the allocation from 8% to 13%. Fixed Income (+4%): Global yields remain near post-GFC highs with 10-year UST around 4.2% in December 2025. I reallocate from 10% equities-focused bonds to 14% fixed income (CHF Corporates +5%, EUR Govt Bonds +3.5%, US Treasuries +2%), establishing duration exposure and counter-cyclical protection ahead of Fed rate cuts. Japan (Unchanged): Japan’s structural reforms and BOJ stimulus remain supportive, but a 3% Asia Developed exposure is adequate. JPY strength vs USD and CHF acts as a tailwind on existing holdings. Asia EM (+0.5%): Increase from 10% to 10.5% to capture Chinese stimulus and attractive tech valuations. CNY appreciation vs USD provides diversification and a natural hedge against dollar weakness. Alternatives (+0.5%): Increase Listed PE/Alt from 1.5% to 2%, maintaining access to Swiss private markets and uncorrelated returns with currency-matched positioning. Gold (+1%): I increase from 4% to 5%. Gold serves as a hedge against USD weakness while benefiting from record central bank reserve diversification. This measured increase captures structural de-dollarization demand without chasing 2025’s roughly +58% performance. Crypto (+0.5%): I increase from 4% to 4.5% as a diversification component. At the end of this article, I have included a short, more technical insight into how I structured my research process. 2025 portfolio performance chart comparing total portfolio return vs S&P 500 and 60/40 benchmark, showing CHF-hedged strategy outperformance 2025 portfolio performance chart comparing total portfolio return vs S&P 500 and 60/40 benchmark, showing CHF-hedged strategy outperformance Before we dive into the detailed rationale for my 2026 asset allocation, let’s quickly look at how this portfolio performed this year. The portfolio delivered solid returns in 2025, outperforming the 60/40 benchmark, primarily driven by the CHF-hedged S&P 500 allocation and domestic dividend stocks, with CHF-hedged gold providing additional diversification gains. The 11.5% USDCHF depreciation proved to be the defining factor this year, while the S&P 500 returned +18% in USD. Unhedged USD exposure translated to just ~5% in CHF terms, vindicating the currency-hedged core equity strategy. Detractors included the unhedged MSCI World SRI ETF, also hit by FX exposure.

Now if you are still with me, let’s dive into the five themes that I believe to be important going into the next year.

• Market Concentration and High Valuations: The S&P 500 has become dangerously concentrated. As of December 2025, the top 10 companies represent approximately 45% of the index’s value, a historic concentration level not seen since the dot-com bubble. Nvidia alone accounts for over 7%. What was once a diversified investment across 500 companies is now heavily weighted toward a handful of tech giants, most betting heavily on AI. S&P 500 treemap visualization showing market cap concentration: Nvidia 7.2%, Apple 6.6%, Microsoft 5.9%, with top 10 stocks representing 40% of index S&P 500 treemap visualization showing market cap concentration: Nvidia 7.2%, Apple 6.6%, Microsoft 5.9%, with top 10 stocks representing 40% of index

The top 10 US companies dominate the world equity market: Top 5 US tech firms alone have a collective value ($17.6) that exceeds the combined GDP of the Japan, India, UK, France, and Italy ($17.1).

Bar chart showing top US companies dominate global equity markets, with top 5 tech firms valued at $17.6 trillion, exceeding most national GDPs Bar chart showing top US companies dominate global equity markets, with top 5 tech firms valued at $17.6 trillion, exceeding most national GDPs Even though there might be a consensus view among analysts that elevated valuations are supported by earnings growth rather than multiple expansion alone,

Valuations are especially high in the US. The S&P500 trades at 23 times forward earnings, near the top of its historical range. While the Nasdaq’s 30× trailing P/E is well below the dotcom bubble peak, it still reflects significant optimism. Outside the US, valuations are more moderate: European and Chinese equities are 10% and 7% above their 20-year average valuations, respectively, and Japan’s index trades at a discount to its long-term average. via UBS Year Ahead

The Shiller CAPE ratio sits at 40.5 as of early December 2025, more than double its historical mean of 17.3 and approaching levels last seen, again, during the dot-com peak. S&P 500 Index Shiller CAPE Ratio (1871-2025) S&P 500 Index Shiller CAPE Ratio (1871-2025) Under these circumstances, I think small-cap and international equities offer more attractive entry points than US large-cap indices. This creates an opportunity to shift part of the US equity holding out of the S&P 500 into a mix of: S&P 500 value index funds (excluding high P/E ratio stocks), mid-cap stocks, international index funds (for geographic diversification), and small-cap stocks (which have more normal valuations and haven’t experienced the same speculative growth). This also aligns with my view that the AI boom might not end with a winner-takes-all situation for the hyperscalers.

• US Dollar Depreciation Expected Despite Continued Dominance: There is growing consensus among analysts for continued dollar weakness, with JP Morgan estimating the currency remains roughly 10% overvalued and Goldman Sachs projecting 4% depreciation over the coming year. But, dollar dominance in global finance will erode only slowly over decades through structural shifts in trade and GDP share, while dollar valuation can decline much faster due to less exceptional US economic performance and difficulty attracting unhedged capital flows. The key driver is the US’s shrinking share of global trade and persistent fiscal deficits, not an imminent collapse of reserve currency status. This aligns with the points we outlined in our previous review of Pozsar’s Bretton Woods III.

This distinction is clearly visible in historical data: according to IMF COFER data, the dollar’s share of global reserves has declined gradually from 71% in Q1 1999 to 56% by Q2 2025, a structural erosion occurring over 25 years. In contrast, the trade-weighted dollar index has experienced far more volatile swings, fluctuating between 95 and 130 over the same period, with particularly sharp movements during crisis periods (2008 financial crisis, 2020 pandemic). The dollar can lose 15-20% of its value in just a few years while maintaining its reserve currency dominance. Recent strength to 130 in 2022-2024 appears unsustainable given widening fiscal deficits and declining US share of global trade, suggesting room for significant near-term depreciation even as the dollar’s reserve status erodes only gradually. Dual-axis chart showing USD share of global reserves declining from 71% (1999) to 56% (2025) alongside trade-weighted dollar index fluctuations between 95-130 Dual-axis chart showing USD share of global reserves declining from 71% (1999) to 56% (2025) alongside trade-weighted dollar index fluctuations between 95-130 The divergence between structural dominance (slow decline) and cyclical valuation (rapid fluctuations) shows that dollar depreciation can occur independently of reserve currency status changes. Gold and the dollar typically move in opposite directions, and when the dollar weakens, gold becomes more attractive as an alternative store of value, driving its price higher. The outlook for gold in 2026 reflects a convergence of supportive factors beyond simple dollar weakness. Gold has already broken above $4,000/oz for the first time, driven by persistent inflation volatility and increasing demand from both investors and central banks. The structural case strengthens as central banks accelerate reserve diversification, with official sector gold purchases reaching record levels in 2023-2024 as institutions reduce dollar concentration. Chart comparing Gold prices and Dollar Index from 1985-2024, showing gold's rise from $300 to $2,700 and the dollar's cyclical fluctuations, illustrating their inverse relationship Chart comparing Gold prices and Dollar Index from 1985-2024, showing gold's rise from $300 to $2,700 and the dollar's cyclical fluctuations, illustrating their inverse relationship I modestly increased my FX-hedged gold position from 4.0% to 5.0%, reflecting upgraded return forecasts but keeping the allocation measured, given gold’s exceptional performance: up roughly 58% year-to-date through December 2025. This increase captures institutional conviction without chasing momentum.

• AI Investment Remains Central But Requires Scrutiny: Almost all investment reports I read over the past weeks position AI as the dominant investment catalyst, with capex projected to reach $571 billion in 2026 (UBS) and potentially $1.3 trillion by 2030. The five largest hyperscalers now account for ~27% of S&P 500 capital expenditure. Bar chart of infrastructure investment peaks as % of US GDP. AI capex projections for 2026 (1.9%, $571B) and 2030 (3.8%, $1.3T) would surpass all historical infrastructure booms including Broadband 2000 (1.15%) and Electricity 1949 (0.98%). Asterisks denote projected values from UBS Bar chart of infrastructure investment peaks as % of US GDP. AI capex projections for 2026 (1.9%, $571B) and 2030 (3.8%, $1.3T) would surpass all historical infrastructure booms including Broadband 2000 (1.15%) and Electricity 1949 (0.98%). Asterisks denote projected values from UBS AI capital expenditure is projected to reach $1.3 trillion by 2030 (3.8% of US GDP), which would exceed all previous infrastructure booms including broadband (1.15%), electricity (0.98%), and the Apollo program (0.74%). However, as UBS notes,

no investment boom has ever seen capital spending perfectly match future demand.

I personally view the current AI boom as potentially speculative at least in terms of the current valuations, with many top S&P companies having inflated price-to-earnings ratios. I’m also not convinced that AGI is imminent or that AI model providers will capture most of the economic value, believing AI may become a competitive commodity where value flows to companies using AI rather than those providing it. For portfolio allocation purposes, the actions derived are consistent with what we outlined in (1) Market Concentration and Active Management Opportunity.

• European Fiscal Revolution Creates Investment Opportunities: Germany’s historic abandonment of its debt brake policy, committing over €1 trillion to infrastructure, defense, and security spending (with an additional €600 billion in private sector commitments), represents a structural break from decades of fiscal conservatism. Bar chart of Germany's fiscal spending breakdown: €500B infrastructure fund, €400B defense spending, plus €600B private sector commitments totaling over €1.5 trillion Bar chart of Germany's fiscal spending breakdown: €500B infrastructure fund, €400B defense spending, plus €600B private sector commitments totaling over €1.5 trillion JP Morgan upgrades eurozone growth to 1.5% and Goldman Sachs identifies a structural shift focused on defense independence, energy security, and reindustrialization. This fiscal activism is expected to narrow the US-Europe growth differential from 60bps to 30bps, making European equities, currently trading at a 22% discount to global peers, increasingly attractive despite elevated valuations elsewhere. Bar chart comparing regional equity valuations: US at 23x forward P/E versus Europe at 14x, showing 22% European discount to global peers Bar chart comparing regional equity valuations: US at 23x forward P/E versus Europe at 14x, showing 22% European discount to global peers

• Fixed Income Offers Best Prospects Since Global Financial Crisis: Higher starting yields and steeper curves have dramatically improved bond return potential. As of early December 2025, 10-year US Treasuries yield around 4.2%, with medium-duration quality bonds expected to generate mid-single-digit returns. All major research houses project 2-3 additional Fed rate cuts in 2026, while the ECB is expected to hold steady and the Bank of Japan to continue hiking. As usual it is to be expected that front-end yields are more sensitive to central bank policy and offer strong counter-cyclical properties, while fiscal concerns drive term-risk premia higher at the long end, benefiting strategic curve positioning. Bar chart showing 60/40 portfolio returns minus cash at 1-year and 3-year intervals after major crises (1990-2022). Average returns: 7% at 1-year, 22% at 3-year Bar chart showing 60/40 portfolio returns minus cash at 1-year and 3-year intervals after major crises (1990-2022). Average returns: 7% at 1-year, 22% at 3-year Michael Cembalest, Chairman of Market and Investment Strategy, J.P. Morgan Asset & Wealth Management on the impact of geopolitical events:

It is shocking how little geopolitics actually matters to markets unless it gets truly terrible.

• Other points to consider: (1) Global growth remains resilient, with the US expected around 1.8% and global growth near 2.5%. Consensus points to America’s economic outperformance becoming “less exceptional” relative to other regions. (2) Expect elevated inflation volatility and sticky pricing pressures. Fed easing cycles are underway, but the path remains uncertain with tariffs adding to price pressures. (3) Europe’s fiscal pivot is the big story. Germany’s €1 trillion spending bill marks a historic shift, with broader European infrastructure investment accelerating. Fiscal deficits globally may weigh on currencies. (4) Economic nationalism is reshaping global dynamics. US effective tariff rates have reached levels not seen since 1934, creating a new trade order that markets must price in. (5) China’s Tech sector remains a top global opportunity despite tensions. Stimulus measures are supporting equities, and yuan appreciation is expected as growth stabilizes. (6) Attractive entry point for quality bonds. 10-year UST yields around 4.2% in December 2025 offer compelling returns, with better starting valuations than recent years. (7) Elevated geopolitical risks persist: Russia-Ukraine, Middle East tensions, and broader great power competition remain market-moving factors. (8) Bitcoin with institutional adoption accelerating ETF inflows continue and corporate treasury allocations are expanding. Regulatory clarity improving in the US, though enforcement actions remain a wildcard. Leverage buildup in derivatives markets. Watch for Bitcoin halving aftermath effects and macro liquidity conditions as primary drivers.

A short note on my analysis process: (1) I combed through insights and data from analyst and research outlooks by Goldman Sachs Asset Management, J.P. Morgan Asset Management, Morgan Stanley, and UBS Investment Research. (2) I wrote a script to convert large PDFs to Markdown and optimize them for LLM processing. (3) I then used Claude agents to look for differences and similarities in the reports, which created an extensive overview. (4) This served, together with my own thoughts and opinions, as the basis for my 2026 allocation.

This article is for informational purposes only, you should not consider any information or other material on this site as investment, financial, or other advice. There are risks associated with investing.