We spend significant time each quarter discussing inflation because we believe it is the single most underappreciated risk in most investors' financial plans. We refer to it as a "deep risk," meaning it doesn't show up as a sharp loss in your account on any given day, but quietly and persistently erodes the real purchasing power of your wealth over time.

Consider the price of a stamp. In 1971, it cost 8 cents. Today, it costs 78 cents. That represents an average annual inflation rate of approximately 4.2%, and since 2020, the inflation rate on stamp prices has more than doubled that historical average. Multiply that dynamic across everything in your life.

Looking at 152 countries since 1971, not a single one has averaged less than 2% annual inflation. Switzerland comes closest at 2.2%. More than 100 countries have averaged above 5%. The United States has historically been on the lower end of that spectrum, but even here, inflation is a constant and compounding force.

This is precisely why our portfolios are intentionally built to generate returns that exceed inflation over time. We work not just to grow your wealth in nominal terms, but to preserve and grow it in real terms.

When analyzing equity market expectations, we use a simple but powerful framework:

Market Return = Earnings Growth (E) + Dividend Yield (Y) + Change in P/E Ratio

Applying this to the S&P 500 today, earnings are projected to grow approximately 17% over the next 12 months. The dividend yield sits near 1.3%. The forward P/E ratio is approximately 20.24. If valuations hold steady this math supports an expected return in the range of 18% for large cap equities over the next year.

The same framework applied to mid cap stocks yields similar results. Mid cap earnings are projected to grow approximately 17.6%, with a dividend yield near 1.7% and a forward P/E of around 16.2. Small cap stocks show earnings growth near 18% and an even higher dividend yield at 2.29%, with a forward P/E closer to 14.85. The lower valuation multiples in mid and small cap stocks represent a potential opportunity for investors with appropriate time horizons.

It's also important to note that S&P 500 profit margins are currently near record highs. During recessions, profit margins compress sharply. We saw this dramatically in 2008. The fact that margins are expanding, not contracting, is a meaningful signal about the underlying health of corporate America.

One reason earnings estimates continue to move higher across the market is the unprecedented level of capital being deployed into artificial intelligence infrastructure. The major hyperscalers — Amazon, Microsoft, Meta, Alphabet, and Oracle — are collectively projected to spend over $800 billion on capital expenditures by 2028. Understanding what is driving this spending, and where it flows through the economy, is an important part of interpreting the current market environment.

It is also worth understanding what AI investment does not yet guarantee. The long-term productivity gains from AI are still being established. Many businesses are in early stages of integrating these tools into their operations, and the path from capital deployment to realized economic benefit takes time. Investors should distinguish between the near-term earnings impact of infrastructure spending, which is measurable and visible in current data, and the broader transformational claims about AI's ultimate economic impact, which remain to be proven out over a longer time horizon.

What the data does show clearly is that S&P 500 earnings growth estimates for the next 12 months are running near 17%, with AI-related spending playing a meaningful role in supporting those projections.

For decades, the conventional approach to portfolio construction was a blend of public equities and fixed income — stocks for growth, bonds for stability. While that framework served investors reasonably well in certain environments, it leaves significant opportunity on the table and exposes portfolios to risks that are increasingly difficult to manage with just two asset classes.

At Chicago Partners, we build out the DNA of our client portfolios to include three distinct layers: public securities, hybrid securities such as interval funds, and private securities including private equity and private credit. Each layer plays a distinct role, and importantly, these layers are designed to be lowly correlated with one another.

Private credit was a central topic this quarter, as there is a lot of noise in the news on this asset class. It has been one of the strongest performing asset classes in fixed income over the past two decades, and we believe it continues to offer compelling value for long-term investors.

Looking at the historical record from 2005 through 2025, private credit has ranked as the top-performing fixed income category in the vast majority of years. In 2025, it returned 9.3% which was stronger than high yield bonds, investment grade bonds, senior loans, and cash.

Investors can access private credit through several different structures, each with its own liquidity profile. Drawdown funds require a long-term capital commitment of 10 to 12 years with no redemptions during the investment period. Evergreen funds offer more flexibility, with a one-year lockup followed by the ability to redeem quarterly, subject to limits of 5 to 10% of net asset value. Interval funds, which are registered with the SEC and structured similarly to mutual funds, offer the most liquidity, with redemptions available quarterly or semi-annually, typically capped at 5 to 7% of shares. Understanding which structure fits your situation is an important part of how we personalize each client's portfolio.

We also addressed two concerns that come up frequently in the press. The first is whether private credit could trigger the next financial crisis. The short answer is no — and the comparison to 2008 doesn't hold up under scrutiny. Banks leading into the financial crisis were leveraged 25 to 40 times, funded by short-term deposits, and exposed to subprime mortgages packaged into complex derivatives. Today's private credit vehicles operate with less than 1x leverage, lend at roughly 40% loan-to-value to corporate borrowers, and don't rely on overnight capital. The structural differences are vast.

The second concern is what some are calling the "SaaS apocalypse" — the idea that AI will devastate software companies and, by extension, impair private credit lenders to those businesses. Here's the key point: for private credit to be impaired, the equity cushion below it in the capital structure would need to be wiped out first. Loans are typically made at roughly 37% loan-to-value, meaning more than 60% of a company's value would need to erode before the debt itself is at risk. That's a substantial buffer, even in a scenario of meaningful disruption.

Most investors focus on the average return of their portfolio. But the sequence and volatility of those returns matters just as much. This is the concept behind what we call the volatility tax.

Here's a simple example: imagine two portfolios that both average a 10% return over 20 years. One achieves that return through steady, consistent gains. The other experiences wide swings with big up years followed by big down years. Despite the same average return, the portfolio with volatile swings will compound to a significantly lower ending value. That difference is the volatility tax.

Over a 20-year period, reducing the volatility translates to nearly $2 million in additional wealth on a starting investment of $1 million. This is one of the primary reasons we include lowly correlated assets in our portfolios, for their ability to allow capital to compound more efficiently.

The 14 Stages of Trading Psychology is a framework we revisit regularly because it helps explain why investors make the decisions they do, and why those decisions might work against them.

The cycle moves from optimism and excitement, through thrill and euphoria at market peaks, then down through anxiety, denial, fear, panic, and capitulation at market bottoms before recovering through hope, relief, and back to optimism again. The critical insight is this: the point of maximum financial risk is at the peak, when everything feels great and it seems like the market will only go higher. The point of maximum financial opportunity is at the bottom, when fear is highest and most investors are walking away.

You may be at a different part of the peaks based on your current financial needs. Some clients might be near their all-time portfolio highs, even if the daily noise of market headlines makes it feel otherwise. Understanding the psychology behind investing can help you avoid rash decisions and navigate the ups and downs of the financial cycle.

There is always something to worry about in the markets. Looking back over the last 40 years, the S&P 500's long-term upward trajectory has been punctuated by the Gulf War, the dot-com collapse, September 11th, the housing bubble, the COVID pandemic, and countless other crises that felt, in the moment, like they might be different.

This is sometimes called the "wall of worry"; the market climbs it anyway. Not because risks don't exist, but because the underlying engine of economic growth, corporate innovation, and human productivity tends to prevail over time.

History also shows that geopolitically driven market volatility tends to be short-lived. Across more than 20 major conflicts and crises going back to the Korean War, the S&P 500 has averaged a return of 1.5% in the month following the initial shock, 2.8% over three months, 5.9% over six months, and 8.4% over twelve months. There are exceptions, the Yom Kippur War and the War in Afghanistan being notable ones, but the broad pattern is one of resilience.

Perhaps the most powerful argument for staying fully invested comes from a simple piece of data: an investor who missed just the 10 best trading days in the S&P 500 between 2004 and 2024 saw their return cut in half compared to someone who stayed in the market the entire time. Miss 20 of the best days, and your return falls by more than 70%. What makes this particularly important is that many of the best days in the market occur right around the worst days, making market timing not just difficult, but harmful to long-term wealth accumulation.

The markets will always present uncertainty. Interest rates will rise and fall. Geopolitical events will create volatility. New technologies will disrupt industries and create new ones. What doesn't change is the value of a disciplined, diversified approach built on sound principles, and the importance of having a team in your corner that is constantly researching, analyzing, and adapting on your behalf.

If you have questions about anything covered in this update, or if your financial situation or goals have changed, please don't hesitate to reach out.