MARKET OUTLOOK

It was a rough start to 2025. After the Administration's announcement of their plans for higher than expected tariffs on April 2nd, the S&P 500 fell more than 12% in less than a week and more than 20% from its high in February. Policy uncertainty gradually declined in the coming months as world leaders hammered out deals, and the markets staged a remarkable comeback.

By the end of the year, U.S. equity (stock) markets realized double digit rates of return in 2025 for the third year in a row. The rest of the world also enjoyed healthy returns for equities. In fact, international stocks performed better than U.S. stocks for the first time in years. By year-end nearly every asset class (stocks, bonds, and most commodities) showed positive returns with the precious metals (gold, silver, and copper) ending the year with the largest gains. Most cryptocurrencies, however, experienced losses for the year.

By the end of 2025, the price of gold had increased over 62%. The surge in gold prices was a function of several factors that have been in play over the past several years. Foreign central banks, especially in the emerging markets, continued buying the metal as a way to diversify and reduce their reliance on the U.S. dollar and Treasuries. Military conflicts and geopolitical tensions caused uncertainty around the world and led investors to the "safe haven" assets, such as gold. Inflation concerns drove investors to the metal because it is often used to protect purchasing power when inflation remains persistent. Lastly, concerns over U.S. fiscal policy and our ballooning national debt pushed investors toward tangible assets like gold.

As for U.S. stocks, roughly 50% of the S&P 500's 2025 gains were attributed to a small handful of AI-driven mega-cap stocks, as the euphoria around this new technology continued. Attention is being paid to the bifurcation of the S&P 500 index and over concentration of these stocks. When AI stocks are separated from non-AI stocks, only 49 companies in the S&P 500 are AI-related but represent nearly half of the S&P 500 by market capitalization. We haven't seen this much concentration of one industry representing the stock market index since the railroads stocks did decades ago. As a result, it has distorted returns. In fact, if you took out gains of AI stocks, the S&P index would have fallen last year.

Concern is building as to whether or not we have a "bubble" in AI stocks. The stock prices of many of these companies have risen dramatically, leading to the question of whether or not they are over-valued. Additionally, these mega companies have been spending trillions of dollars to build the infrastructure for this technology. To do so, some AI companies are beginning to take on debt to finance their investment. AI is also very dependent on energy. What if the lack of energy stops the boom? The only type of power that can support this grid is nuclear power, and that will take years to get up and running. There is no debate that artificial intelligence is an important technological revolution. Some feel it's bigger than the internet or electricity. But like the internet, there will likely be disruptions in the market and with jobs in the early stages as was the case with the internet. Though valuations are high making AI stocks more expensive, they continue to realize greater profitability, which should support their continued rise. Fortunately, the big players in the AI race are those with solid profits and strong balance sheets.

Attention is also being paid to the issue of affordability and our K-shaped economy. A K-shaped economy is the term used to describe the U.S. population whereby the wealthy are getting wealthier and the poor are getting poorer. According to Moody's, the top 10% of income earners (those earning $145,000 to $150,000 per year or more) accounted for 49% of consumer spending last year, which has kept the economy growing. Economists generally agree this development first emerged in 2020, during the COVID pandemic and its aftermath. Different parts of the economy moved in opposite directions. Higher income individuals did well because of their stable employment in primarily white-collar jobs. They also benefited from rising assets prices (i.e. increased property values and higher stock portfolios). Lower income individuals, on the other hand, fell behind. Many lost their jobs, which were primarily service-related. The surge in real estate prices after the pandemic made owning a home more difficult for many Americans, and also pushed rent prices higher. A statement famously made last year by Treasury Secretary Scott Bessant was that the current Administration would focus on "Main Street versus Wall Street". This means that policymakers may be more tolerant of market volatility in their response to the K-shaped economy if broader economic goals are met.

Risk comes from what you don't see coming. Fortunately, we feel there is slightly more visibility regarding rates, tariffs, inflation, and jobs as we head into the new year. It is likely we'll see no change to the policy on tariffs. But we have yet to know their longer-term impact should they continue or increase. Lower interest rates will likely stimulate economic growth. Yet, if the Fed were to cut rates too much, it could cause a resurgence in inflation. Corporate profits are expected to rise across the world in 2026 due to lower interest rates and less uncertainty around tariffs, though this may not translate to higher stock prices. Investor euphoria around AI should continue. But when will the benefits of AI be commensurate with the amount of spending being done on infrastructure? With most of the stock market gains coming from the AI stocks, so much is riding on them. With stock valuations already at extremely elevated levels, it makes these stocks vulnerable to pullbacks. Employment growth has slowed, raising concerns over unemployment. Yet with population growth down, we may not need to add as many jobs as we historically have done.

Despite all the potential headwinds facing us, we do expect the bull market for stocks to continue. Bull markets tend to run for many years, though it's normal for stocks to experience corrections along the way. Historically, the S&P 500 has experienced a correction (defined by a decline of at least 10%) every 1.5 - 2 years since 1950. We may have a strong economy, though it could still translate to weaker markets. Keep in mind that the economy and markets are not one and the same. The economy once drove the stock market, but now that seems to be reversed. Our message for 2026 is to expect increased volatility, not overreact to headline-driven events, and to manage expectations regarding portfolio returns.

ALL EYES ON THE FED

The media continues to report on the pressure the current Administration has been putting on Jerome Powell and the Federal Reserve (known as the Fed) to lower interest rates in order to boost the economy and reduce government borrowing costs. With Powell's term as Fed Chairman coming to an end this May, all eyes are on the Federal Reserve as Treasury Secretary Scott Bessant searches for his replacement. The question is whether or not the Administration will choose someone who shares their views. Amidst the noise, many are making the case around the importance of the Federal Reserve remaining an independent body without the influence of politics.

What is the role of the Federal Reserve, and how do they make decisions regarding interest rates and monetary policy? The Federal Reserve System is the central bank of the United States. It was created by Congress in 1913 in response to the panic of 1907 to put in place controls of the nation's monetary system. Prior to that, the monetary system of the country was largely controlled by wealthy businessmen and banks. The system today includes the seven Board of Governors, who are nominated by the President and confirmed by the Senate, as well as 12 Federal Reserve banks around the nation. The Fed Chairman also serves as Chairman of the Federal Open Market Committee (FOMC), which is a group of the 12 voting members who are responsible for deciding monetary policy.

The Federal Reserve has several functions. It conducts the nation's monetary policy in order to achieve its primary goals of full employment and stable prices. It supervises and regulates banks to ensure safety and soundness. It also maintains stability of the financial system and contains systemic risk that might arise, as was the case during the COVID pandemic. Lastly, it provides certain financial services in overseeing the nation's payment systems. Its main tools used to control monetary policy are interest rates, open market operations (buying/selling government bonds), bank reserve requirements, and quantitative easing or tightening. For example, it could cut interest rates to encourage borrowing and spending. Conversely, it could raise rates to slow down borrowing and spending.

Fiscal policy, on the other hand, is controlled by the President and Congress. It focuses on public spending, tax cuts or increases, and tariffs, which affect budget deficits or surpluses. For example, the government could increase spending or provide tax cuts to boost demand. Conversely, it could reduce spending and raise taxes to cool demand.

The Fed relies on a broad dashboard of economic and financial data. Policymakers are continually weighing how this data affects their dual mandate of price stability (inflation) and maximum employment. Their primary focus has been inflation. With their target rate of 2.0%, the rate of inflation in the U.S. has been exceeding their target since 2020. They also rely on data regarding the labor market, economic growth, housing, global and fiscal considerations, as well as credit, banking, and financial stability.

Mistakes made regarding either fiscal or monetary policy can have negative consequences that last for years. In hindsight, it is argued that the excessive fiscal spending that continued long after the COVID pandemic ended resulted in the spike in inflation in 2022 that we are still struggling to lower. After all, the single biggest driver of inflation is government spending. Additionally, it is argued that the Federal Reserve was wrong to keep interest rates at 0% for 15 years after the Great Financial Crisis of 2008. The unprecedented amount of stimulus distorted the system and caused the U.S. debt to balloon to its current level of $37 Trillion. Today, some believe that the Fed is in the midst of a policy mistake by cutting rates, despite inflation being higher than their target. But it's the weakening labor market that is causing division among policymakers regarding the Fed's dual mandate of stable prices and low unemployment. Therefore, the Fed might cut rates further if the labor market shows additional weakening, despite inflation being above target.

Now the focus is on who might be the incoming Federal Reserve Chair and what the Fed might do with interest rates in the coming year. Will they remain independent of political pressure and rely purely on economic data to guide them? Will the economic data they follow lead them to the most beneficial decision for the economy? Fortunately, policy is not decided solely by the Federal Reserve Chairperson. Instead it's decided by the FOMC. For now, the markets are pricing in one to two more rate cuts this year.

HELP US GROW OUR TEAM

Suzanne Satler, who has been one of our client service representatives and team member for over 30 years, is planning to retire this coming September. We will soon be searching for her replacement. Hers are very big shoes to fill, so we anticipate our search to be challenging. Who better than our valued clients, like yourselves, who have worked with Suzanne and our team throughout the years, that might know of someone that could be a good fit for us.

Experience in the financial services industry is not required. However, it's key that this person has prior business experience and is extremely organized, detail-oriented, professional yet friendly, dependable, and enjoys helping people.

Perhaps you have a friend, family member or colleague that is looking for a career with a firm where they can plant roots. If anyone comes to mind, please have them reach out to us by calling (412) 856-7300. We'd love to speak with them. As always, thank you for your continued loyalty and the trust you place in us.

Sources: Gallup, Yahoo Finance, Internal Revenue Service, Social Security Administration, and Centers for Medicare & Medicare Services.

Disclaimer: The opinions expressed herein do not necessarily reflect those of Trustmont Financial Group, Inc./Trustmont Advisory Group. Inc. Trustmont Financial Group and Trustmont Advisory Group do not provide tax or legal advice, or supervise tax, accounting or legal services. Trustmont representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice. Additionally, the information contained herein has been obtained from sources believed to be reliable but the accuracy of the information cannot be guaranteed. Lastly, reference to any product, service or concept in no way implies that it is suitable for everyone. There may also be risks and costs associated with any product, service or concept mentioned herein. Where applicable, a prospectus should be read for complete details. The material presented here is neither an offer to sell nor a solicitation of an offer to buy any securities. Past performance is not a guarantee of future results. Dollar cost averaging does not assure a profit or protect against a loss. Diversification can help an investor manage and reduce the volatility of an asset's price movements; however, no matter how diversified a portfolio is, risk can never be eliminated completely.

TAXATION UPDATE

As a reminder, the "OBBBA" passed last summer brought changes to the 2025 tax year, retroactively. One change is the new "Senior Discount". Effective for 2025 through 2028, individuals who are age 65 and older may claim an additional deduction of $6,000 (which would be $12,000 total for a married couple where both spouses qualify). This new deduction is in addition to the current standard deduction. The deduction begins to phase out where modified gross income exceeds $75,000 for singles and $150,000 for married filers.

According to the Internal Revenue Service, Social Security Administration, and Centers for Medicare & Medicaid Services, the following are tax rules and limits for the 2026 tax year.

• The tax rates for 2026 are the same as last year, but the income ranges have increased slightly. They are:

Tax Rate	SINGLE FILERS Taxable Income Between	MARRIED FILING JOINTLY Taxable Income Between
10%	$0 -$12,400	$0 - $24,800
12%	$12,401 - $50,400	$24,801 - $100,800
22%	$50,401 - $105,700	$100,801 - $211,400
24%	$105,701 - $201,775	$211,401 - $403,550
32%	$201,776 - $256,225	$403,551 - $512,450
35%	$256,226 - $640,600	$512,451 - $768,700
37%	Over $626,350	Over $768,700

• The standard deduction for 2026 rises to $32,200 for married filers (plus $1,650 for each spouse age 65 or older), $16,100 for single filers (plus $2,050 if age 65), and $24,150 for heads of household (plus $2,050 if age 65).

• The limit for contributions into a 401(k), 403(b) and 457 INCREASES another $1,000 to $24,500. The additional catch-up contribution will be $8,000 for those age 50-59 or age 64 and older and $11,250 for those ages 60-63.

• The limit for contributions to a SIMPLE IRA also INCREASES another $500 to $17,000. The additional catch-up contribution will be $4,000 for those age 50-59 or age 64 and older and $5,250 for those ages 60-63. However, certain applicable SIMPLE plans have higher contribution limits of $18,100 plus a $3,850 catch-up for those age 50-59 or age 64 and older and $5,250 for those ages 60-63. These higher limits are the same as they were for 2025.

• The limit for contributions into a Traditional or Roth IRA INCREASES to $7,500 for those under age 50 plus an additional $1,100 for those age 50 or older for a total of $8,600. You can also contribute at any age as long as you have EARNED income that is equal to or greater than your contribution.

• Taking the deduction for Traditional IRA contributions may be limited for those who participate in an employer-sponsored retirement plan. The AGI income phase-out increases to $129,000-$149,000 for marrieds, $81,000-$91,000 for singles, but holds at $0-$10,000 for married filing separately. Where only one spouse is active in a plan, the phase-out increases to $242,000-$252,000 but remains $0- $10,000 for married filing separately.

• The income limit phase-out for making Roth IRA contributions is $242,000-$252,000 for married filers, $153,000-$168,000 for single filers, but $0-$10,000 for married filing separately.

• The 0% tax rate on capital gains and qualified dividends still exists. It applies to married filers with income less $98,900 and to single filers with income less than $49,450. After that, the 15% capital gains tax rate applies until income exceeds $613,700 for married filers and exceeds $545,500 for single filers at which time the 20% rate applies.

• Social Security recipients are receiving a 2.8% cost-of-living increase in their monthly benefit for 2026.

• Medicare Part B premiums increase in 2026 to $202.90 per month. However, premiums are based on a recipient's modified gross income, using the tax return from two years prior. For those with modified gross income for 2024 in excess of $109,000 for individual filers or $218,000 for married filers, their 2026 Part B premiums will be higher. This is referred to as "IRMAA" (income related monthly adjustment amount), which applies whether or not the recipient has original Medicare or Medicare Advantage for their insurance coverage.

• The Social Security wage base for this payroll tax also INCREASES to $184,500 for 2026.

• Those collecting Social Security before full retirement age can earn $24,480 in 2026 without losing benefits. But individuals who reach their Full Retirement Age during 2026 can earn up to $65,160 IN THE MONTHS BEFORE reaching FRA without losing benefits.

• The annual gift tax exclusion REMAINS at $19,000 per recipient.

• The lifetime estate and gift tax exemption for 2026 jumps to $15,000,000.

• The child tax credit remains at $2,200 per child UNDER the age of 17 at the end of the year, due to the "OBBBA". To qualify for the full amount of the credit, annual income cannot be more than $400,000 for married filers and $200,000 for all other filers.

• The contribution limit to a Health Savings Accounts ("HSA") jumps to $4,400 for single coverage and $8,750 for family coverage, plus an additional $1,000 for HSA owners age 55 or older. To be eligible, you must have a high deductible health plan.