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Fourth Quarter 2025 Performance Recap

(As of December 29, 2025)

Client portfolios have produced double digit gains in 2025 for the third year in a row and in line with benchmark returns for most clients. Looking back on 2025, we see a year characterized by resilience from corporations and consumers amidst a weakening labor market, inflation, and a volatile business and political environment. Although it was not a smooth ride, many companies executed exceptionally well, driving stock prices higher. Bonds also had a good year as inflation moderated. The Federal Reserve cut rates several times and attempts to complete a “ *soft landing *” for the economy, simultaneously lowering inflation without suffocating the labor market. One of the best performing areas of the market this year was metal commodities. With several catalysts, Gold outpaced both stocks and bonds. Several markets down for the year include oil, many agriculture commodities, and cryptocurrencies. The economy continues to gradually slow, and although it has remained resilient for several years, some factors may be starting to take effect.

Equities - A Roller Coaster Year

Equities had a wild ride through 2025. In the first quarter of the year, stocks appeared to be “ *taking a breather *” from their massive run in 2024. This digestion of gains was accompanied by the expectations of tariffs being implemented by the Trump administration. Expected tariff rates ranged from 10-20%. Kicking off the second quarter, tariff rates on April 2nd were announced and ranged from 10% on some countries up to 34% for China and 46% on Vietnam, two of our biggest trading partners. Analysts slashed expected earnings for companies with exposure to higher tariffed countries, and economists reduced expected GDP and global trade dramatically. Retaliation and tit-for-tat reciprocal tariffs led to one of *the worst multi-day sell-offs in stock market history *, with the S&P500 dropping by over 10% in two days. The damage was quickly reversed. Treasury Secretary Scott Bessent quickly began walking back the highest tariffs, although the average tariff rate is still significantly higher than it was a year ago at this time.

Throughout the third and fourth quarters of the year stocks continued to rebound off the April lows as corporations delivered strong earnings which pleased investors. There is still much hype surrounding AI ( *Artificial Intelligence *) and everything it touches. Some areas in the market got overheated and were subsequently punished. Oracle (ORCL) is a recent example of this. The stock jumped by over 40% in one day

following strong results tied to AI, but the gains did not stick, and the stock is now down nearly 50% from that level. AHIA has identified several similar situations and remained disciplined in our investment approach to avoid them.

SP500 (SP500) Grinds Higher and up nicely for the year

Clients have enjoyed several big wins in their portfolios this year.

GE Vernova (GEV) had another strong year as demand for energy appears to be insatiable. The company’s management team has set goals and executed extraordinarily well, including the turnaround of their least profitable segment. Similarly, GE Aerospace (GE) has benefited from strong execution. The maker of airplane engines, who makes most of their money from servicing, operates in an area with very little competition. This is the source of the companies "Moat", the thing that protects their profit from competition. Another top performer with a significant competitive advantage is Constellation Energy (CEG) . As the largest nuclear energy producer in the U.S., Constellation is tied to the increasing energy demand driven by AI. Finally, a recent addition that has performed well is Globus Medical (GMED) , a medical device producer whose products are used in spinal surgeries.

Top Winners	Top Decliners
Alphabet (GOOG, GOOGL)	Oneok (OKE)
Constellation Energy	BYD (BYDDF)
GE Aerospace	Arista Networks (ANET)
GE Vernova	Amazon (AMZN)
JP Morgan (JPM)	Costco (COST)

Overall, the winners of 2025 have been large companies with high momentum. Most top performing stocks this year are in some way tied to AI and its build out.

Fixed Income

Short to intermediate term bond yields declined steadily throughout 2025, increasing the value of bonds held in client accounts. The 10-year Treasury dropped from 4.57% to 4.11%, and the 2-year Treasury declined from 4.24% to 3.49%. This was driven by a reduction in the policy rate set by the Fed following macroeconomic data showing cooling inflation and a weak labor market, both of which support lower interest rates.

The US Treasury yield curve is steepening significantly.

AHIA continues to invest in high grade bonds with low default risk. In tax deferred accounts (such as IRA’s), we continue to invest in Corporate and taxable Municipal debt. In taxable accounts, we use a blend of tax-free municipal and hybrid preferred equity securities.

In our opinion, federally tax-exempt municipal market continues to be the best risk-reward area of the market on a tax-adjusted basis.

A new addition to the portfolio this year is the Victory Pioneer Catastrophe Bond Fund . This fund predominately invests in reinsurance catastrophe bonds and pays a high yielding dividend, thus has returned well more than traditional debt securities. The La Nina weather pattern has protected the eastern United States this year from hurricanes.

Commodities & Crypto’s

It was another banner year for commodities. Gold, which has been a material portion of client portfolios for nearly the entire year, has outperformed the stock market, rising 70%. Cryptocurrencies, on the other hand, did not have a good year. As is typically the case, Bitcoin led the way on a wild ride, rising over 30% before crashing and turning negative for the year. We have avoided cryptocurrencies as they offer limited value to society and investment opportunities. The relationship between Bitcoin and Gold is inverse, as *investors seeking risk buy Bitcoin and investors reducing risk typically buy Gold *.

Gold Has Gained 70% on Its Best Annual Rally Since 1979, Bullion has topped $4,500 an ounce for the first time

The Economy

Overall, the economy remains resilient . Inflation appears to be under control, but the labor market may be stalling. A careful look into the details reveals a new and very troubling problem dubbed “the ‘K’ shaped economy”. This term is used to define a situation where one group sees continued appreciation and growth in their assets, while another group that doesn’t own assets misses out on the appreciation, thus falls further behind. This is what we are seeing unfold broadly across the economy right now as the upper quartile of consumers is seeing rapid growth in their equity portfolios while their money markets have yielded around 4% this year. Unfortunately, many people do not have investment portfolios and have *missed out on these gains *while at the same time battling higher interest rates on debt. The result of this is that the same amount of goods and services is consumed overall, but by a decreasing number of people. This “ *wealth affect *” can come to an abrupt halt if the markets crash.

The K-Shaped Recovery

Another concerning trend is the decreasing spread between wage gains and inflation. Typically, we want to see wage gains that are greater than inflation as this increases real purchasing power for consumers. If you get an annual raise of 3.5%, the first 3% is eroded by the effect of inflation. Thus, the increase in purchasing power is only 0.5%. This is another factor in pressuring consumers. Furthermore, many products and services that have increased significantly in price are not adequately reflected in the popular inflation indices. The supply and demand imbalances caused by Covid-19 created the first big increase. Tariffs presented the second blow to push prices higher. Looking to 2026, the increase in health insurance could be the next factor to increase prices since this is effectively an increase in labor costs.

Problem Wedge: Inflation is rising and wage gains are slowing

Source: Bureau of Labor Statistics

Healthcare employment has been growing for years and serves as a stabilizing ballast for the overall economy. Should current or future government actions lead to a decrease in healthcare employment, consumer spending could be negatively impacted.

Overall, the economy is expected to increase by 2% ( *Gross Domestic Product consensus estimates of Bloomberg survey *). The first half of 2026 will get a boost with expected tax refunds higher than in recent years. However, lower tax rates leading to refunds will increase the Federal Deficit. Similar to borrowing on your home equity line for pizza and beer. At some point, the debt will be unsustainable, and the bond market will let us know by yields spiking higher. Consumer spending is projected to increase 2%, a bit lower than previous years while private investment is projected to rise 2.3% led by AI ( *Artificial Intelligence *) data center build out.

Investment Strategy – First Quarter 2026 and Beyond

The financial markets are concluding another year with significant gains. Stocks were the best performers in 2023 and 2024, while Gold was the top performer in client accounts in 2025. Performance in the fourth quarter 2025 was more challenging due to the upturn in stocks and Gold moving in a sideways trend with sharp moves up and down as investors debate the next primary trend. Looking into the New Year 2026 , we expect more ups and downs until new leadership emerges.

The economic macro trends shaping our investment strategy might slow, but still forecast positive economic growth, Federal Reserve policies promoting lower short-term interest rates, continued massive AI capital investment, falling oil prices, and continued geopolitical risk.

These key trends and other emerging factors will be monitored by facets impacting our asset allocation and security selection within client portfolios.

Our asset allocation is less aggressive than in the past years. Positioning portfolios that are underweight in stocks and overweight in fixed income, compared to most clients’ investment targets. After three years of strong stock market returns, future returns appear harder to come by. *Stocks now trade at premium valuation *while earnings growth may be peaking. Further, the second year of the presidential cycle historically has the lowest returns.

Asset Allocation Overview

Asset Class	Allocation Relative to IPS	Strategy	Notes
Stocks	Underweight	Defensive	Premium valuations, earnings growth peaking
Bonds	Overweight	Income Focus	Laddered high-quality bonds, attractive municipal yields
Cash	3% – 5%	Liquidity Reserve	Flexibility for opportunities and risk management
Alternatives	Gold 5%	Hedge & Diversification	Gold as a core holding, safety asset

Predicting stock market returns is a challenge due to many factors that emerge overtime. In 2026, stocks could return below 10%, which is the long-term average since 1980. Throughout 2025, we harvested profits in stocks and purchased laddered bonds in many client portfolios. Also, Gold has been appreciating more than expected. We *plan on maintaining the position in Gold *as it nears all-time highs.

Boring Bonds Have their Place in Portfolios

Shifting our analysis to specific strategies within asset classes, fixed income is the foundation of client portfolios. Most client portfolios have a base of laddered high-quality bonds with low risk of default complemented with a few higher yielding securities with a *bit of pizzazz *. For taxable accounts, tax-free municipal bonds are attractive for maturities beyond five years. The advantage of being a small firm is that we can purchase “ *odd lots *” of municipal bonds that frequently have yields 1/4% to 1/2% higher than more actively traded bonds.

To complement the core bond holdings, we continue to hold preferred stocks in Key Bank (KEY) and JP Morgan . Preferred stocks provide yields over 6%, although they tend to be irrationally volatile. Recently, preferred stocks have been hurt by the crypto-related preferred stock, Strategy , which has declined sharply. The Strategy preferred stock’s decline has pulled the entire Preferred Stock sector lower despite many of the issues having nothing associated with crypto currencies.

Our largest fixed income holding is the Victory CAT mutual fund that yields 9%. While the Victory CAT fund risks are associated with extreme weather events and earthquakes, they are diversified from economic conditions.

Stock Market Opportunities with Technology Sector Waning

The role of the equity portion of client portfolios is long-term capital growth. With the leadership of the technology sector waning, we are adjusting our expectations for equity holdings. Within the technology sector, there appears to be a shift from the producers of the AI data center to the users. For example, Apple (AAPL) has limited investment in AI but will be a big user of AI via apps on your phone. Conversely, Nvidia (NVDA) may be at risk for moderating growth. After three years of extreme growth, the AI group of stocks is undergoing a new phase of scrutiny. This phase of AI consolidation will pass as the benefits of AI are significant and will dramatically benefit society in aggregate.

With the technology sector losing its domination, we plan on shifting to other sectors and companies that meet our criteria for earnings growth, high barriers to competitors entering the market, and positive stock price momentum. While innovation remains key to long term performance, we see a shift appearing away from the builders of AI and to users of AI.

Technology remains the largest sector in the SP500 index at 35%. Most clients hold much less than SP500, but it is still the largest sector overall. Top holdings include Google’s corporate parent company, Alphabet , a top performing stock in the 2nd half of 2025. Other top holdings include Nvidia , Microsoft (MSFT) , Arista Networks , and Apple . These stocks are driven by superior earnings growth and positive sentiment. Earnings growth rates will most likely be moderate, and investor interest is no longer growing as the AI buildout is well known throughout society. This is kind of like football fans getting bored of *Kansas City Chiefs in the Superbowl three years in a row *.

Alphabet’s stock has increased nicely in the 2nd half of 2025

Microsoft’s stock has not performed in the 2nd half of 2025 despite excellent earnings reports circled below.

While the Technology sector has been losing momentum, the financial sector has been gaining speed. Our holdings include JP Morgan and recent additions including First Horizon (FHN) , Goldman Sachs (GS) , and Skyward Specialty Insurance (SKWD) . The financials are benefiting from short-term interest rates falling while longer term interest rates are holding steady, increasing lending margins of banks. Also, we expect mergers of banks to accelerate in the New Year. First Horizon is a possible acquisition candidate. We purchased First Horizon after the CEO stated on an investor call that the company had no plans to be acquired, which led to a sharp 10% drop in the stock price.

First Horizon’s Stock drop created a buying opportunity for astute investors

After a rough 2025, the property and casualty insurance industry should benefit from the steep yield curve and more stable premiums. After years of large premium increases, insurance premium inflation slowed in 2025, hurting stock prices, but corporate earnings generally remain strong. Skyward ensures unique risks not usually covered by traditional commercial insurers.

Healthcare is another large sector in most client accounts. The sector has performed poorly until recently. Concerns over government policies towards drug approvals and the impact of the future of ACA and its implications on the lives of those currently insured. When sentiment appeared to bottom out, we added Thermo Fisher Scientific (TMO) , the leader in diagnostic equipment for universities, government agencies and drug developers. We also added a long-term holding in Vertex (VRTX) , one of the most technically advanced pharmaceutical companies. Vertex’s pain management is slowly gaining new patients, and their new drug development continues with positive milestones. Also, we added Globus Medical , a leading orthopedic company focused on spine-related products and equipment. Recently, a local doctor, Dr. Amanda Sacino, presented her successful usage of Globus Medical’s robotic navigation via the spine system, ExcelsiusGPS. This small company has excellent long-term potential, but the ride could be bumpy.

Jumping to the fun stocks in the consumer discretionary sector, performance has been mixed. Yeti (YETI) has risen 28% during the 4th quarter, while Garmin (GRMN) has fallen 18%, and Amazon is up 2%, continuing lackluster stock performance. Yeti rose on expected sales growth of Buffalo Bills branded drink wear. Garmin fell on earnings outlook only in line with analysts’ estimates, and Amazon has lost investors’ interest due to substitutes for AI, despite strong financial performance. Maybe 2026 will be better as retail and technology services continue to grow.

One important theme of portfolios is energy infrastructure. After decades of level demand for electrons, the electric demand is now growing. Increased demand is resulting from data centers. Further, electric vehicles, industrial growth, and hotter summers are also increasing demand.

The challenge with managing investment into new electrical capacity is managing the cost, time to construct, and impact on communities in managing water, noise, and emissions. The chart below from BloombergNEF shows natural gas, solar tracking, and onshore wind being the cheapest. Coal and offshore wind are twice as expensive. Nuclear energy, although a producer of electricity, is about ten times as expensive as the cheapest sources. In addition to cost and community impact, nuclear energy takes possibly ten years to construct. While there is interest in SMR ( *Small Modular Reactors *) technology, this is in development and not proven or cost competitive, thus not a realistic option for powering a data center in the next ten years. Solar is the quickest to construction with Bloomberg NEF team suggesting a one-year time frame.

Levelized Cost of Electricity

Source: BloombergNEF Bloomberg Intelligence BI

Several portfolio holdings cover most major aspects of energy demand. NextPower (NEXT) sells solar tracking and battery storage. GE Vernova is the largest company providing gas turbines, wind, nuclear, and grid equipment. In addition, they service their equipment after the sale. EQT (EQT) produces natural gas while Oneok is a pipeline that transports gas, oil, and other hydrocarbons around the central USA. Finally, two companies that make electricity include Duke Energy (DUK) and Constellation , the largest nuclear power provider in the US. As the AI trade has waned, the stocks providing power to data centers have become volatile as investors harvest profits after years of appreciation. With US electricity demand increasing about 4% a year, these holdings still have significant growth potential.

Other positions scattered across several sectors are strategically outside of the AI ecosystem. Deere (DE) , a former core holding, is back in portfolios after a few rough years. Farm incomes have fallen due to the loss of foreign customers, while steel tariffs have increased the cost of metal tractors, a double hit to Deere. Our thesis is that economic circumstances improve farms and innovation of products drive an improvement in sales and profits in the next few years. In a similar contrarian thought process, we established a small position in Rivian (RIVN) after the EV tax credits expired. New products upgrades coming next year could drive sales higher. Despite the negative political cloud over EV’s, they remain the cheapest, safest, and least environmentally impacting mode of transportation, according to Stanford Professor of Civil & Environmental Engineering, Dr. Mark Jacobson.

In the consumer area, we have sold Costco to realize a tax loss and added positions in Proctor and Gamble (PG) . The high-quality staples stocks had low quality stock returns in 2025 that may be ready for a comeback year. Last month, we added a small position in Ulta Beauty (ULTA) as the New CEO, Kecia Steelman, has re-energized the company as the leader in cosmetics, fragrance, skin and hair care. Quality growth stocks like Proctor and Gamble and Ulta have been out of investors’ interest for several years as technology were leaders. 2026 may be the year for new leaders that use technology rather than manufacturing technology.

In Alternatives, Gold remains a Core Holding

Alternatives are a “catch all” asset class. Most portfolios have an allocation of about 5% in Gold. The drivers behind Gold’s performance in 2025 are likely to continue into 2026. First, central banks globally are believed to accumulate Gold. As political instability grows, confidence in the US Dollar has declined. The threats to the Federal Reserve’s independence highlight this issue. Second, for years, cryptocurrencies were believed to be safe asset classes in case of financial market fallout, but recent experience suggests that cryptocurrencies are highly correlated with speculative trends, not safety assets. While Gold does have a commercial purpose in industrial, dental, and jewelry, cryptocurrencies lack material commercial purposes outside of nefarious activities. Thus, in 2025, Gold regained its reputation as a safety asset.

A Review of Risk Management Strategies Used in Portfolios

With portfolios up significantly over the past three years, it’s a good time to review our principles and strategies toward portfolio risk management. Consideration of negative outcomes often is overlooked while in a bull market for several years. Risk management begins with analysis of client portfolios first at the asset class level, then security selections within asset classes.

The first step and possibly the most important is the decision of allocation to asset classes, or the mix of stocks, bonds, cash, and other asset classes. Our first consideration is the client’s annual cash needs over the next five to seven years. The funds needed to cover cash needs, in addition to a safety factor, is often allocated to fixed income. The fixed income portion of the portfolio is invested in bonds with very high credit ratings to minimize the risk of default. Further, we practice diversifying bond portfolios by purchasing many issues to limit exposure to any one issuer. After the 2008-2009 financial crisis, we learned the importance of liquidity and credit quality after seeing many investors’ retirement funds decline in value and lack sufficient liquidity to be sold. Our solution has been to invest this portion of a client’s portfolio in high grade publicly traded bonds. With maturities aligned with the expected timing of cash needs, this provides predictability and financial security and serves as the foundation of most portfolios.

The Long-Term Investment Harvest Process

1. LONG-Term Stocks (represented by a bar chart and city skyline) feed into Profit Harvesting (represented by a gear).
2. Profit Harvesting feeds into the Calendar Sequence of High-Quality Bonds (represented by Q1, Q2, Q3, Q4 2024).
3. The Calendar Sequence of High-Quality Bonds leads to Bonds Mature (represented by an hourglass).
4. Bonds Mature results in Cash Proceeds Transferred (represented by a wallet and coins).
5. Cash Proceeds Transferred is used to meet CLIENT’S Living Needs .

After allocating funds to the bond portfolio, most residual funds are allocated to growth investing in the stock market. The role of the growth portfolio is long-term capital appreciation, which will eventually end up in the bond ladder.

In addition to diversification in different asset categories, management of individual holdings considers risk reduction principles. While constructing stock and bond portfolios, we are careful to avoid securities that are highly correlated to each other. Too many stocks trading together can lead to large losses when markets decline. Another risk reduction principle is to sell losing positions. Usually, when a position declines by 10% to 20%, it becomes a candidate to be sold before a more significant loss is experienced.

2025-2026 Tax, Charitable and Retirement Planning Updates

The 2026 tax law changes will provide higher deductions and more brackets, while those who are considered high income earners will no longer get an additional deduction for the catchups to retirement plans as the catch-up must be made on an after-tax basis to Roth plans. More changes include less generous charitable deductions for high income taxpayers, and the new “Trump Account” for children ages 18 and younger.

Category	2025	2026	Notes
Additional Tax Break (Age 65+)	$6,000 ($12,000 if filing jointly)	$6,000 ($12,000 if filing jointly)	Subject to income phase out:$175,000 Single /$250,000 MarriedApplies to tax years 2025–2028
IRA Contributions	Up to age 50: $7,000Age 50+: +$1,000catch-up	Up to age 50: $7,500Age 50+: +$1,100catch-up	Applies across all IRAs (Traditional + Roth)Cannot contribute more than earned income
401(k), 403(b), 457, Simple Ira	Up to age 50: $23,500Age 50+: +$7,500catch-upAges 60–63: +$11,250“super catch-up”	Up to age 50: $24,500Age 50+: +$8,000catch-upAges 60–63: +$11,250“super catch-up”	Applies to employer-sponsored plansSuper catch-up for ages 60–63

*Starting January 1, 2026, catch-up contributions for 401(k), 403(b), and governmental 457 plans must go into a Roth account if your prior-year wages exceed the $145,000 threshold (indexed for inflation; expected to be ~$150,000 for 2025 wages) which is measured by Social Security wages (Box 3 on your W-2).

Charitable Giving, State Income Taxes & Trump Accounts

Category	2025	2026	Notes
Charitable Giving	Qualified Charitable Distributions from IRA’s for RMD’s:$108,000 (Single)$216,000 (Joint)	Qualified Charitable Distributions from IRA’s for RMD’s:$115,000 (Single)$230,000 (Joint)	Donor Advised Funds/Fidelity Charitable Account (Gift bunching)Non-Itemizers: $1,000 (Single) / $2,000 (Joint) in 2026Itemizers: 2025 last year for no floor on AGI/Full deduction up to 37%, 2026 subject to 0.5% of AGI/Deduction capped at 35%
State Income Taxes	Increased cap on SALT: $40,000 (from $10,000) if income < $500,000	Same as 2025	Applies where state income tax is applicable
Trump Accounts	N/A	Starting July 4, 2026: New tax-advantaged savings accounts for children with SSN and under age 18.Sign up through Treasury Department (opens mid-2026)Children born after 2024 and before 2029 get $1,000 one-time "gift"Up to $5,000/year can be deposited until age 18Contributions are non-deductibleAccounts grow tax-deferredNo distributions until age 18 (then taxed as ordinary income)May rollover to IRA

Disclosures:

Andrew Hill Investment Advisors, Inc. is registered as an investment adviser with the Securities and Exchange Commission (SEC) and only transacts business in states where it is properly noticed filed, or is excluded or exempted from such requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the adviser has attained a particular level of skill or ability. Information on this website is directed toward U.S. residents only. Information in this publication does not involve the rendering of personalized investment advice but is limited to the dissemination of general information on products and services. We may alter opinions after the delivery of this document to readers. A professional adviser should be consulted before implementing any of the options presented. Please review our complete disclosures at Andrew Hill Naples Investment & Wealth Management Advisor

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