Dear Advisor Partners,

After 37 years in the business and 21 years running PICTON Investments, I find that at least [KB1] one truth remains: markets will always find new ways to remind us that certainty is borrowed, not owned. This year has been no different. The AI boom became both a “can’t miss” revolution and then a financing riddle. Inflation seemed to be cooling until wasn’t. The Fed stayed disciplined and then seemingly gave in to external pressure. Meanwhile global markets rallied to new highs as some investors started to question the risk reward opportunity of many stocks leading the AI revolution. What passed for long-term opportunity often became just shorter-term momentum.

By “Building from the Bear Up” we strive to bring greater certainty to investors. This mission reflects our belief that portfolio resilience should always be of paramount consideration when building portfolios for investors. We honour our commitment to resilience every year, regardless of the market backdrop. We stick to our disciplined investment process, actively managing risk while continuing to look for opportunity. This is how we’ve built the firm, and how we will continue to build it into 2026 and beyond.

What follows are some reflections on our journey: how our business advanced, how our industry evolved, and where we see opportunity ahead.

La bulle immobilière et la spéculation accrue

En début d’année, nous avions signalé que les valorisations des grandes capitalisations technologiques américaines entamaient une phase de bulle. Une brève correction en février s’est estompée aussi rapidement qu’elle était apparue, remplacée par une nouvelle vague d’enthousiasme alimentée par l’intelligence artificielle, qui a propulsé les marchés vers de nouveaux sommets en milieu d’année. La même minorité d’« hyperscalers » a continué à se livrer à une course aux dépenses d’investissement, construisant des infrastructures pour un avenir axé sur l’IA tout en générant une part de plus en plus réduite des rendements totaux du marché. Ce qui a commencé comme de l’innovation est devenu de la concentration et, avec elle, de la fragilité.

Long-term historical metrics are flashing warnings only rivaled by the 1999 bubble. The Shiller Cyclically Adjusted P/E (CAPE) has soared to 42[i], surpassing the 2021 peak. Meanwhile, the US stock market’s capitalization as a percentage of Nominal GDP has reached an unprecedented high of around 200%[ii]. Even after removing the Magnificent 7" tech stocks from benchmarks, the remaining S&P 493 have an Equity Risk Premium that hovers near zero, offering little compensation for taking the risk of holding stocks over safe government bonds (unless those AI related gains create new levels of broad productivity gains that drive earnings growth much higher than currently expected).

The spectacular rise in equity prices since the pandemic lows has created a powerful wealth effect, boosting the equity portion of U.S. household net worth to over $60 trillion[iii] and fueling consumer spending for those fortunate enough to own assets such as their home and/or a sizeable investment portfolio. However, this also makes the economy more sensitive to a setback in the AI trade and/or an increase in long-term interest rates that negatively impacted housing prices (which are already under pressure in some recently popular sunny destinations). This systemic danger is more amplified since US households have never been more exposed to equity market swings given nearly 50% of their financial assets tied are tied up in stocks (which is double the long-term average)[iv].

But US markets have not been the only game in town as many other country’s stocks markets have actually outperformed US benchmarks year to date. The Canadian market has surprised this year with the S&P/TSX Composite Index quietly outpacing the S&P 500 Index while keeping pace with the mighty Nasdaq. This is against a backdrop where sudden tariff changes combined with lackluster productivity measures have made Canadian fundamentals mixed at best in the near term. Perhaps a simple lesson could be that when too much attention and soaring valuations converge too tightly in one market, it can pay to look elsewhere. Europe, Japan, and many emerging markets delivered meaningful returns for those willing to look beyond the glow of the US AI narrative.

Signals that would normally move in alignment now point in sharply different directions. Inflation is cooling yet remains vulnerable. Growth engines are reawakening, even as structural pressures mount. Technological progress is accelerating, but the financial burden of that progress may exceed the capacity of private markets. And central banks, particularly the U.S. Federal Reserve (Fed), confront a policy landscape where the risks of acting and not acting appear equally consequential. In such an environment, our responsibility as stewards of capital is not merely to interpret these opposing forces, but to recognize their coexistence and prepare for a wide range of outcomes. This year’s letter outlines the most important dimensions of these mixed signals and how they may shape the investment landscape ahead.

1. The U.S. Inflation Outlook: Disinflation in Motion, Risks Still Alive

From an inflation standpoint, the United States is delivering genuinely encouraging data. Goods prices have normalized after years of volatility, supply chains are fully repaired, and real-time rental market indicators strongly suggest that there should be continued declines in shelter inflation, a critical factor in upcoming CPI prints. The labor market is cooling in a controlled manner, with job openings, wage growth, and quits returning to pre-pandemic levels. These forces together support the view that inflation is gradually grinding down toward the Fed’s target.

Yet, our optimism must be tempered by the risks that remain. Core services inflation continues to display stubborn resilience, wage growth still runs ahead of productivity, and the U.S. housing market has shown early signs of reacceleration. Combine this with highly expansionary fiscal policy and the lingering lessons of the 1970s, and it becomes clear that inflation is not yet “solved.” The risk of a reacceleration remains very real. Investors must remain attentive to the delicate balance between disinflationary progress and potentially inflationary undercurrents.

2. Geopolitical Tension: Tactical Calm Amid Strategic Fragmentation

On the geopolitical front, we are witnessing a world that is simultaneously stabilizing and fragmenting. Encouragingly, major powers such as the U.S. and China have reopened military, diplomatic, and economic communication channels, reducing the risk of accidental escalation. Key regional conflicts, while dangerous, have remained contained rather than metastasizing into broader wars. And despite political noise, global interdependence continues to exert a stabilizing influence.

However, beneath this tactical calm lies a deeper structural shift toward long-term, systemic rivalry. U.S.–China technological and military competition is intensifying. The South China Sea, Taiwan Strait, Eastern Europe, and Middle East remain volatile flashpoints. Global governance institutions are weakening, supply chains are being reshaped around national security priorities, and economic nationalism is replacing globalization.

3. The Global Economy in 2026: A Potential Upswing, But Not Guaranteed

There are reasons to believe the global economy should enter a more “constructive phase” in 2026. Major central banks are well into their easing cycles, enabling credit expansion after years of tight financial conditions. Large-scale public investments in clean energy, semiconductor manufacturing, infrastructure, and global supply-chain modernization will still be flowing through the system. Emerging markets with demographic strength, especially in South and Southeast Asia, are positioned to contribute meaningfully to global growth. If these forces align with improving real incomes and sustained momentum in technological innovation, the world could experience a synchronized growth rebound.

But this optimism is balanced by real vulnerabilities. Geopolitical shock risks remain elevated, global debt burdens are substantial, and several countries face challenging refinancing cycles in the 2026–2027 window. Demographic headwinds and structurally slower productivity growth constrain long-term potential output. At the same time, governments have less fiscal flexibility than in prior cycles.

4. The U.S. Outlook in 2026: A Path to Strength, with Fragility Underneath

The U.S. economy faces the same duality as global markets. By 2026, monetary policy will likely be more accommodative, corporate balance sheets remain fundamentally strong, and transformative public investment programs such as CHIPS, IRA, and infrastructure modernization will still be powering manufacturing, energy, and technology growth. Higher income consumers, supported by gradually improving real wages, should continue to anchor economic resilience. And if AI and automation drive even moderate productivity gains, the U.S. could experience meaningful tailwinds in 2026.

Yet, the risks are just as material. Years of high interest rates are creating a wall of refinancing needs across commercial real estate, credit-sensitive corporates, and households. Fiscal deficits are large and growing, limiting the government’s ability to respond to future downturns. Productivity gains from AI are still speculative, not yet guaranteed. Political uncertainty around the 2026–2027 policy landscape could also dampen business confidence. The U.S. economy has a credible path to renewed strength, but pitfalls remain.

5. AI and Technology Investment: The Promise—and the Financing Challenge

Nowhere are today’s mixed signals more vivid than in artificial intelligence. The upside case is extraordinary: faster enterprise adoption, new AI-native applications, efficiency breakthroughs, and massive public- and private-sector investment. This could trigger a multi-year infrastructure super-cycle involving data centers, chips, networking, and power generation. If realized, the economic impact would be profound.

Yet, the challenges of financing this future are equally extraordinary. AI infrastructure is so capital-intensive that industry leaders have recently acknowledged the limits of private capital to fund it all. OpenAI’s leadership has publicly stated that the next generation of frontier models may require investments measured in trillions, a scale that may only be feasible with government support or public-private partnerships. Add in power-grid constraints, regulatory uncertainty, and the possibility that AI productivity gains materialize more slowly than hoped, and it becomes clear the AI boom carries significant risk as well as opportunity. At the very least,

6. The Fed’s Dilemma: Cut Now or Wait?

Finally, the U.S. Federal Reserve faces one of its most complex decision sets in decades. On one side, inflation is cooling, real rates are restrictive, and the economy risks overcooling given the long lags of monetary policy still working through the system. On the other side, services inflation remains sticky, wage growth is still elevated, and premature interest rate cuts carry the risk of reigniting inflation at a time of renewed housing strength and excessive fiscal stimulus. The Fed is balancing the risk of staying tight for too long against the risk of easing aggressively too soon. Either direction carries meaningful consequences for growth, credit markets, and asset valuations.

In the face of this uncertainty, the goal of the advisor shouldn’t be to make predictions of how markets will play out. Advisors need to stay focused on what they can control: how they can enhance the client experience and where they can add value to help investors better reach their goals. We believe that the best way to accomplish this in any environment, let alone an uncertain environment, is through better portfolio construction. A resilient portfolio is one that can help investors reach their financial goals with greater certainty. And a resilient portfolio needs to take advantage of what Henry Markowitz is generally credited with saying, “proper diversification is the only free lunch in finance”. While the concept of diversification is quite straight forward, it requires a willingness to explore new ideas and to think about portfolios as collections of return streams as opposed to traditional asset classes.

In our pursuit of helping others create better portfolio outcomes, we have spent the last decade trying to better understand how big pools of money allocate capital. Understanding how major institutions and endowments invest helped inform us about how we should design our product line up to better serve them. One key insight we garnered was that while returns matter, the way those returns interact with the rest of the portfolio matters more. This is the foundation of the Total Portfolio Approach that informs our investment strategies today.

Instead of focussing on rigid asset class silos and benchmarks, the Total Portfolio Approach tries to look at a portfolio holistically where every investment must compete for allocation based on its marginal contribution to the portfolio’s goal. It requires a unified risk framework that is applied across all asset class and a dynamic approach that can adjust to changing market conditions. Capital efficiency is an important contributor to the process. Simply put, any asset that you invest in should simply be viewed as a return stream, and how all a portfolio’s return streams interact is critical to the resilience and long-term success of the portfolio in reaching an investor’s goals.

The key principles that underpin the Total Portfolio Approach have driven the way we have invested in our own business to this point. To get here required investing in our team and developing our own sophisticated analytics and risk systems.

We also believe this process has created better alignment and understanding of our clients’ goals which is the most important outcome.

This evolution values portfolio architecture over product proliferation, and disciplined risk allocation and durability of outcomes over the pursuit of short-term performance.

Diversification is no longer viewed as a defensive exercise, but as an essential element of design. Advisors are borrowing the best ideas from institutional investing and translating them into portfolios that work for everyday investors. Many advisors are beginning to embed alternative return drivers alongside traditional exposures to help create portfolios that are more balanced, adaptive, and built to endure both up and down markets. They are using alternatives to design more diversified portfolios that combine traditional market exposures with long/short equity, arbitrage, long/short credit, and multi-strategy approaches that help compound returns steadily through uncertainty. Many are going a step further and integrating alternative exposures with low-cost passive market exposures. This more thoughtful approach integrates fee budgeting best practices that give investors the best bang for their fee buck. This evolution is changing how we as an industry define value.