Q4 2025 Review: Bubble, Cycle, Value

The world moves in cycles. Some are predictable like the seasons or the tides. When it involves people, cycles are just as inevitable but much less predictable. Whether it’s the business cycle of booms and busts or the investment cycle favoring growth or value, each iteration is different.

All cycles include periods of great optimism and fear. Optimism reigned in the Roaring Twenties only to give way to the Great Depression, Post World War II euphoria ended in the turbulent 60s, and within a decade the balanced budgets of the 90s collapsed into the Great Recession. 

Remarkably, it has been 17 years since the end of the Great Recession. After plunging 50%, the stock market has returned more than 1000%, or 15% annually, since bottoming. Along the way, investors faced no shortage of reasons to worry—the European debt crisis, the BP oil spill, the U.S. credit downgrade, Brexit, and Covid—but those who stayed invested were well rewarded.

This year was no different, as the familiar tension between optimism and fear played out again. An optimist saw reasonable economic growth. Despite Trump’s tariffs, inflation and interest rates moved lower, and the economy retained momentum amid renewed investment and deregulation efforts.

A pessimist focused on inflation above the Fed’s target and affordability as the real concern. They worry about government and corporate debt becoming the primary engines of growth, keeping long-term rates elevated even as short-term rates fall. They also point to emerging stress in the labor market and Trump’s aggressive foreign policy as additional sources of uncertainty.

On the surface, it appeared the optimists won in 2025, with global markets finishing the year at all-time highs. But the U.S. dollar fell 10% and international markets outperformed the U.S. for the first time in eight years. Gold and other hard assets posted their strongest year since the 1970s. Even with the S&P 500 up 17%, performance remained heavily concentrated in AI, while economically sensitive stocks once again disappointed—hardly a vote of confidence for the future.

The Bubble

It doesn’t take an optimist or a pessimist to see an AI bubble forming. Transformative technologies almost always produce bubbles as speculation and FOMO come to dominate investment decisions. As we see it, one of three possible bubbles is emerging:

1)  The extreme bubble: AI investment proves largely wasteful because the technology fails to deliver   meaningful productivity gains.

2) The game is over bubble: AI further entrenches today’s largest technology companies, leaving little room for meaningful competition.

3) The disruptive bubble: AI reshapes the economic landscape, creating both challenges and opportunities well beyond today’s incumbents.

While many compare today’s environment to the early-2000s tech bubble, that analogy misses a key distinction: this investment surge is being driven largely by profitable companies with substantial cash flow. That doesn’t eliminate risk—there are legitimate concerns about circular financing, rising debt, and a lack of clear near-term returns—but real constraints remain, particularly in power availability and advanced chip supply, which may temper the impact of an eventual investment slowdown.

Valuations also aren’t extreme. Big Tech trades at higher multiples than the broader market, but those premiums largely reflect faster growth. What places us squarely in camp three is our belief that the status quo will not hold. Current valuations fail to capture the disruptive potential of AI, especially given the scale of investment and the lack of clarity around where the longer-term value will accrue. If AI proves as transformative as railroads, automobiles, or radio, the value will be dispersed well beyond today’s perceived “winners.”

The Cycle

So the question isn’t whether a bubble exists, but how to invest through it.

Compass clients successfully navigated the 2001 tech bubble and the 2007 financial bubbles, though no portfolio is ever fully insulated from broader market contagion. Bubbles are an inevitable part of investing, and while excessive speculation is often easy to spot, investing through it is far more difficult. Holding too much cash, shorting markets or buying hedges can be costly unless timed perfectly. The alternative is a disciplined long-term plan that avoids the most speculative extremes.

Importantly, this allows us to remain optimistic without losing perspective. Risk appetite remains strong, reflected in elevated valuations and tight credit spreads, but encouragingly we appear to be entering a new phase of the market cycle. Late 2025 saw the first meaningful broadening of market participation in several years, with healthcare and cyclical stocks gaining traction and energy markets reminding investors of the system’s fragility.

The equal-weight S&P 500 also began outperforming its market-cap-weighted counterpart, suggesting leadership is widening beyond a narrow group of AI-driven stocks. While the AI hype cycle is far from over, this broadening gives us confidence that the bull market can continue as we position portfolios for durability rather than chase momentum. 

The Value

As such, we’ll continue trimming some of our “heroic” AI winners and reallocating towards companies with more compelling long-term value. Across equity and fixed-income portfolios, our focus remains on high-quality businesses with strong balance sheets and reliable cash flows. 

In our view, AI’s value will accrue less in the tools themselves, which have driven the initial boom, and more in the businesses that use technology to become faster, cheaper, and more efficient. One of our recent investments, Rocket Companies, the largest non-bank mortgage originator in the country, is a good example. Its end-to-end platform spans origination, underwriting, and servicing, using technology to improve speed and accuracy as banks continue to cede market share.

We see similar dynamics across software and platform businesses where scale and access to data matter. Software has been one of the hardest hit areas of the market, but rather than abandoning the sector, we have begun building a position in Veeva Systems, a healthcare-focused company. Healthcare is highly regulated, and because Veeva controls the underlying data and compliance framework, it can deploy AI in ways most startups cannot. Uber is another example, leveraging its scale and network to improve routing, pricing, and overall efficiency.

Diversification also gives us exposure to the physical economy, where AI’s impact will take far longer to materialize. For the first time in decades, we’ve begun buying publicly traded real estate companies unrelated to cell towers. Mid-America Apartment Communities owns 300 multifamily properties across the U.S. Sunbelt. After a Covid-era boom, U.S. multifamily construction is down 60% from its peak

(CoStar). Mid-America is conservatively run, modestly levered, and pays a high and growing dividend, and will benefit from the lack of new construction.

While the housing shortage will take years to resolve, companies tied to repair, renovation, and new construction, such as Pool Corp, Eagle Materials, and Scotts Miracle-Gro, stand to benefit as conditions normalize.

Elsewhere in the portfolio, we are increasing our position in Kinder Morgan Inc., a leading owner of U.S. energy infrastructure, as the production and transportation of oil and gas become increasingly strategic. At the same time, semiconductor related companies like Entegris and Lattice provide differentiated exposure to the broader chip industry as the technology moves beyond large data centers into everyday applications.

Finally, after several years of allowing asset allocations to drift toward the high end of our targets, we are actively rebalancing back towards our intended ranges. This is an honest assessment of the risk versus reward in the market, not a prediction of an imminent correction, and an acknowledgment that cycles can turn faster than expected.

AI may be blowing a classic bubble, but bubbles are a recurring feature of markets. The investors who succeed are not those who try to time the turn, but those who stay disciplined, stay invested, and avoid the most speculative excesses. This approach has worked across many market cycles, and it remains our guide today. Happy and healthy New Year to all!

The Compass Team

A few additional items of note:

Trump Accounts: For clients with young children or grandchildren, please be aware of the new Trump Accounts, a tax-deferred savings vehicle created under the 2025 One Big Beautiful Bill Act. These accounts allow up to $5,000 per child per year in private contributions. For children born between 2025 and 2028, the federal government provides a one-time $1,000 seed contribution. Based on current guidance, establishing an account in 2026 will require filing Form 4547 with your 2025 tax return. Additional details are still emerging, so we recommend discussing this with your CPA. We will share more information as it becomes available.

Schwab Transition: After a busy few months, we will be completing our transition to Schwab over the coming quarters. We feel great about our new custodian and hope you do as well. As always, please don’t hesitate to reach out with any questions or concerns. We know the volume of email alerts is higher than usual. This is largely due to our new cash management tools. If you would prefer to receive a quarterly summary of transactions from Schwab, instead of daily, please let us know and we will send you a form to sign.

_{Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.}