ELLEVEST INSIGHTS

After three consecutive years of impressive market gains, investors find themselves in an interesting position. While strong returns feel reassuring and make spending easier, what economists call “The Wealth Effect”, it doesn’t make financial decisions any easier. 

In fact, today’s investing environment is defined by a jarring disconnect that can feel paralyzing. On one side, we have a wall of political worry, from the tragedies in Minnesota to questions surrounding Federal Reserve independence and renewed tariff threats. On the other, we have a market that seems completely unfazed, with the S&P 500 and Nasdaq climbing another 1.4% and 1.2% in January (on top of already high equity valuations in the US). This glaring gap between headline chaos and stock market gains creates a deep sense of conflict: It feels like the market should be reacting, and because it isn't, we fear the other shoe is about to drop. And that confusion can lead to paralysis, which is the worst position an investor can take.

So, how do we approach this specific investing environment? Let's start by listening to what markets are telling us.

What the Markets Are Telling Us

You might be hearing about the "Sell America" trade. The concept where investors are reducing their US stocks, bonds, and the dollar amidst all the political noise. While it makes for a good headline, headlines rarely prove to be a durable long-term strategy. Most political noise typically has minimal lasting impact on markets. And when it does matter, it’s typically short term. As we’ve seen plenty of times already, this administration tends to course-correct when market reactions become unfavorable.

How has this “Sell America” trade manifested in markets? First, gold has been on a tear, hitting all-time highs north of 5,000. Investors often flock to gold as a hedge against political uncertainty and a weakening dollar. However, because gold lacks fundamental drivers like earnings or cash flow and carries a significant speculative component, it's not something we typically recommend.

Second, international stocks continue to beat US stocks, a continuation from last year. This trend has been driven by expectations of a lower dollar and a continued earnings recovery abroad. Because international valuations still remain lower relative to the US, and we’ve only seen one strong year of this trend in 2025, this rotation could have some staying power. And while we are proponents of international diversification, it’s not at the sacrifice of owning the US altogether. The key word here is diversification.

Overlooked areas: Small Caps and Value Stocks

While everyone focuses on the “Sell America” trade, they’re potentially missing what may be a more significant story. The quiet resurgence of small caps and value stocks. Over the last three months, these cohorts have been outperforming their large cap and growth counterparts without much attention. Yes, we’ve seen false starts from these cohorts in the recent past. However, these cohorts typically lead during early phases of economic recovery, which surprisingly we may be experiencing right now. While 2022 wasn’t an official recession, various sectors experienced rolling recessions since.

Fidelity's Quantitative Market Strategy Denise Chisholm recently highlighted a crucial shift, “Going into 2026, this is the first time in the better part of three years that median earnings growth is finally positive. This is the game changer. The longer the contraction in earnings, the longer the recovery, historically. Our current median earnings contraction was as long as prior recessions, despite the fact that we were never actually in one. That points to the recovery being more durable.”

This means that earnings are recovering across the broader market, expanding market breadth and creating opportunities beyond the large cap growth/tech space that has dominated in recent years.

So, how do you translate this into action?

Rebalance and diversify: Look to take some profits. Notably, five of the "Magnificent 7" actually underperformed in 2025. While the environment for stocks still looks healthy, discipline wins in the long term. You can use those proceeds to de-risk after three years of strong returns, or diversify into the areas mentioned above. Note: be mindful of taxes and create a capital gains budget if needed.

Align with your values: Heavy tech gains, especially in companies that may not align with your personal values, are a great source of capital to move into investments that do. 

Take a “wealthcare win”: You could donate appreciated stock to a charity or a donor-advised fund (DAF) which can help ease the burden of taxes. Or, simply spend it on something you normally wouldn't. Personally, I’ve done both of these over the last few months. I’ve donated some stock and justified upgrades on family vacations. Wealthcare wins? Check and check.

The one thing not to do is do nothing. 

Making proactive money decisions is a form of self-care, what we call wealthcare at Ellevest. After three strong years of gains, you're in a position of strength, even if it doesn't feel that way amidst the current turmoil. 

Use that strength strategically to rebalance where needed, diversify into other opportunities, or perhaps most importantly, allow yourself to use those gains in ways that bring meaning to your life.