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From our families to yours, a sincere thank you for your continued support and our warmest wishes for a happy holiday season and a prosperous New Year!

surprise party

From trade policy upheaval to the ambitious AI buildout, government and corporate initiatives steered the market to a great extent in 2025, creating step-changes in fundamentals that caught many off guard. While these forces ultimately resolved in a profitable way for global equities and indeed most asset classes this year, 2025 serves as a good reminder of the need for investment flexibility.

*S&P 500 Total Return Index YTD Performance. Source:* *barchart.com. Click for larger image*

Interrupting a quiet start to the year, markets were shaken in the spring by seemingly haphazard trade announcements that clouded the outlook for the US economy and effectively froze corporate planning in place. As this information vacuum eventually sent the market careening toward crisis, cooler heads finally prevailed as threats subsided, negotiations started and deadlines were extended in early April. Soon after, markets began to move past this issue, tracing a bottom that would eventually lead to new all-time highs despite trade negotiations still pending nearly eight months later.

Less distracted by government policy, investor focus next turned to an area that remained unaffected by trade- the massive corporate stimulus from “Mag 7” tech giant expenditures on AI infrastructure (chart). For the second year a row, estimates for this figure had to be revised higher after nearly every earnings report as companies seemed to outdo each other in announcing ever larger spending plans, creating a virtuous cycle for equity indexes not only from the Mag 7 names that dominate US indexes but from the downstream effect on the “picks and shovels” of this massive undertaking and on those companies most expected to benefit from AI-related productivity gains.

*Hyperscaler (AI Infrastructure) Capital Expenditures. Source: Goldman Sachs. Click for larger image*

Lending support to the bullish narrative, monetary policy eased further in 2025 with 25bps interest rate cuts in September and October and a third likely in December. As mentioned at October’s “hawkish cut” FOMC press conference, inflation remains a potential threat but while they continue, rate cuts in the context of respectable GDP and earnings growth have historically been supportive for equities.

Zone Defense

*Sharpe Ratio by S&P 500 Beta, 1/3/00 - 11/28/25. Source: TCM,* *barchart.com. Click for larger image*

Because both too much and too little volatility both lead to lower portfolio values over time, TCM’s Risk Managed Equity strategies seek to maintain risk in a purposeful corridor rather than hold it permanently below the market (chart). This approach uses tactical VIX to address crisis risk, yet—unlike other hedged strategies—still lets equities “breathe” through normal volatility, including modest pullbacks that are frequent even in bull markets.

To guard against potential “left tail” events, VIX hedges were signaled by the Volatility Dashboard on a total of 95 days in 2025, beginning as trade headlines gathered steam in January before ultimately providing substantial insulation from the crisis-level volatility around “Liberation Day” in early April when the VIX index peaked near 65. An option not available to statically-hedged strategies, TCM’s tactical approach then recycled hedging profits from this period back into equity exposures in time for the substantial rally over the next several months.

*VIX Index YTD 12/5/25. Source:* *barchart.com. Volatility zones are approximate; actual determination is based on signals from the Volatility Dashboard. Click for larger image*

In the balance of the year, crisis potential was again briefly signaled around the Iran / Israel conflict in June, after tariff threats against China resurfaced in August and finally, after the Fed’s hawkish October interest rate cut sparked a violent rotation away from the AI complex toward more defensive sectors (chart). Ultimately, each of these episodes fell into the “pre-crisis” pattern in which volatility briefly crosses the border between normal and crisis zones, often prompting initial VIX positions that decline in value if equities stage a “V” shaped recovery and volatility quickly returns to normal.

Even with these episodes, Tactical Beta’s 2025 results and indeed, its entire nine-year history show that shielding portfolios from only the truly harmful equity drawdowns delivers a much better cost–benefit tradeoff than hedging every dip and that rather than a panacea, the pursuit of uninterrupted gains is ultimately a recipe for anxiety and underperformance (chart). What’s more, while market outperformance rarely comes without assuming greater risk than the benchmark, TCM’s history has proven that it is possible using a tactical approach and a highly convex hedge like the VIX.

*YTD Return Comparison as of 11/28/25. Tactical Beta net of all expenses and 1% management fee. Source: TCM,* *barchart.com. Click for larger image*

through a lens, darkly

While TCM does not rely on forecasting as part of its investment process, considering a range of constructive and adverse market scenarios can still help frame the current environment heading into the new year. As always, feel free to Contact Us to discuss in more detail.

Market Positive Scenarios

A newly appointed Fed chair is viewed as leaning dovish just as inflation data continues to cool, creating room for further interest rate cuts.
AI capital investment begins to pay off as companies show tangible productivity improvements, margin expansion and ultimately, stronger earnings.
Heading into the midterm election cycle, the Trump administration delivers several market-friendly initiatives—thoughtful deregulation, infrastructure spending, and health-insurance reform among them.

Market Negative Scenarios

Inflation re-accelerates, pressuring the consumer and widening the K-shaped divide in the economy. Though the market does not necessarily require Fed cuts to perform well, interest rate hikes in a high-valuation environment create a materially tougher backdrop.
Confidence in AI capex and future ROI deteriorates as companies scale back initiatives—or are forced to by higher financing costs, with credit markets (e.g., Credit Default Swaps) imposing discipline.
IPO valuations for OpenAI and Anthropic fall short of expectations, dampening sentiment and leaving the market struggling to identify a growth theme beyond AI.