Navigating the Maturing Bull: 2026 where Beta Management is the Prudent Edge
- Strategic Imperative for Volatility and Beta Management: In a high-valuation environment with S&P 500 P/E ratios around 28, incorporating volatility harvesting strategies can offer prudent downside risk mitigation while capturing growth during equity rallies.
- Tactical Outlook Amid Economic Shifts: With U.S. inflation at 2.7% in December 2025—above the Fed’s 2% target—and forecasts for reaccelerating GDP growth around 2.6% in 2026, bolstered by fiscal stimulus and potential skilled immigration reforms, a less dovish Fed policy could sustain elevated volatility, emphasizing the need for beta management.
- Be wary of international equity correlation risks post-Bull Market: Historical data shows international equity correlations spike during bear markets (e.g., averages increasing from ~0.07 in pre-2000 bulls to ~0.3 in bears; post-2000 spikes to 0.5-0.6 in 2008 GFC and 0.6 in 2020 COVID), typically reducing diversification benefits when most needed.
- U.S.-Centric Focus on AI Flows: Global AI investments favor the U.S., with 43% of 2024 private funding directed there (and estimates forecasting over 50% in 2025 and going forward) bolstering the Dollar and domestic growth over international alternatives.
- Positioning for Fixed Income Volatility: Despite Fed cuts, yield curve steepening in 2025 (2-10 spread around +65 bps as of late December) signals unpredictability, supporting a “stay long but hedge for reactivity” stance.
Why a portfolio approach matters and what factors are likely to drive returns:
Forecasts that focus solely on growth levels often miss what matters most to investors: the signature of the portfolio experience—the path, volatility, and drawdowns along the way. As equity markets grapple with elevated valuations—the S&P 500’s current P/E ratio stands at approximately 28 as of late December 2025—and persistent inflation at 2.7%, we believe the strategic case for incorporating a Hedged Equity strategy strengthens. Volatility harvesting, a core pillar of the Easterly Hedged Equity Fund (JDIEX, I share class), can enable downside protection while generating growth during market rallies. Empirical evidence supports this: rebalancing strategies that harvest volatility have historically improved compound returns by capitalizing on market fluctuations, outperforming buy-and-hold in volatile regimes.1,2 This approach aligns with a multi-year environment where high multiples demand both upside participation and defensive overlays.
Tactically, concerns mount over a less dovish Federal Reserve. With inflation still above target and GDP growth projected at 2.6% for 2026, bolstered by fiscal tailwinds from the One Big Beautiful Bill Act (OBBBA)—including retroactive tax cuts expected to deliver up to $100 billion in larger refunds in early 2026— FED policy may remain tighter than anticipated, keeping volatility elevated. While some skeptics view the OBBBA’s refund surge as a temporary “sugar high” masking fiscal risks, the underlying permanent extensions and new deductions provide durable incentives for growth and consumer spending. Some forecasters have pointed to limited skilled labor as a barrier to optimistic growth forecasts. However, we would caution against a dogmatic view that the administration won’t address this critical input. Amid persistent skilled labor shortages, we anticipate the administration will further support highly-skilled immigration in late 2026, building on 2025 reforms, that prioritize higher-wage and higher-skilled workers in the H-1B program through weighted selection and additional fees. We also expect a major initiative from the administration and the corporate sector to expand training programs to bridge jobs gaps and sustain reacceleration. Lastly, after a prolonged period where wage growth lagged inflation and contributed to affordability pressures, recent trends show hourly earnings beginning to outpace price increases—with real average hourly earnings rising modestly in 2025—potentially offering meaningful relief to consumers heading into 2026. That should not be discounted as much negativity has accompanied the K-shaped economy argument.
The most appropriate portfolio solutions should not ignore real risk management. Why we believe Easterly EAB’s hedged equity solution can shine here.
While we see solid US economic progress in the next year, ultimately, greater reliance on earnings to justify prices amplifies the impact of corporate announcements. The economic factors that underpin growth may not sustain the double-digit stock returns of recent years. Post-strong bull markets, correlations often rise, and the likelihood of correction rises. Historical bear markets show international equity correlations increasing significantly (e.g., to 0.5-0.6 in 2008 GFC and 2020 COVID) justifying the solid risk (beta) management characteristics of total return downside protective strategies like the Easterly Hedged Equity Fund. Fixed income, a traditional source of diversification, has proven unpredictable with the yield curve steepening in 2025 (2-10 spread around +65 bps as of late December) despite labor concerns and “insurance cuts,” introducing higher volatility. We generally advocate staying long equities but positioning for market reactivity through hedged strategies. While there is a popular case being made for going abroad, investors should be aware that the benefits diminish under stress as most equity markets correlate to the S&P 500. Moreover, AI and infrastructure buildouts drive capital flows to the U.S., with 43% of 2024 (and greater moving forward) AI funding concentrated here, supporting the Dollar over diversification fears. For investors that are looking to maintain growth against their Dollar purchasing power or inflation, unless one sees significant Dollar weakness, we believe that over diversifying abroad risks losing value unnecessarily. Hedged equity strategies, like the Easterly Hedged Equity Fund, that focus on U.S index-based return and volatility management can offer an optimistic, efficient and commonsense path forward to help drive portfolio resilience.
Easterly Hedged Equity Fund(JDIEX)
Sources
1 Does Volatility Harvesting Really Work? – https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3847692_code1993051.pdf?abstractid=3847692
2 How low volatility boosts compounded returns – https://www.quoniam.com/wp-content/uploads/2024/09/White-Paper_LowVol-EM-Story.pdf
RISKS & DISCLOSURES
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other important information about the Fund is contained in the prospectus which should be read carefully before investing. To obtain a prospectus or summary prospectus which contains this and other information, visit funds.easterlyam.com or call Easterly Securities LLC at 888-814-8180. Performance data quoted represents past performance. Past performance is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. All results are historical and assume the reinvestment of dividends and capital gains. Performance shown reflects contractual fee waivers. Without such waivers, total returns would be reduced. Please click here to view standardized performance for the Fund.
The Easterly funds are distributed by Easterly Securities LLC, member FINRA/SIPC. Easterly Investment Partners LLC is an affiliate of Easterly Securities LLC. Orange Investment Advisers, LLC and EAB Investment Group, LLC are not affiliated with Easterly Securities LLC.
Easterly Investment Partners LLC is the investment adviser to the Easterly mutual funds. Easterly Snow, Easterly Murphy, Easterly Ranger and Easterly ROC Municipals are investment teams of Easterly Investment Partners LLC, an SEC-registered investment adviser. EAB Investment Group LLC (d/b/a Easterly EAB), Orange Investment Advisors LLC (d/b/a Easterly Orange), and Lateral Investment Management are separate SEC-registered investment advisers that are strategic partners of Easterly. Each investment adviser’s Form ADV is available at www.sec.gov. Registration does not imply and should not be interpreted to imply any particular level of skill or expertise.
Not FDIC Insured–No Bank Guarantee–May Lose Value.
IMPORTANT FUND RISK
There is no assurance that the Fund will achieve its investment objective. The Fund share price will fluctuate with changes in the market value of its Fund investments. Mutual Funds involve risk including possible loss of principal. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that increases investment risk while increasing investment opportunity. Derivatives may be volatile and some derivatives have the potential for loss that is greater than the Fund’s initial investment. If the Fund sells a put option, there is risk that the Fund may be required to buy the underlying investment at a disadvantageous price. If the Fund sells a call option, there is risk that the Fund may be required to sell the underlying investment at a disadvantageous price. Shares of ETF share many of the same risks as direct investments in common stocks or bonds. Because a large percentage of the Fund’s assets may be invested in a limited number of issuers, a change in the value of one or a few issuers’ securities will affect the value of the Fund more than would occur in a diversified fund.
Diversification does not guarantee a profit nor protect against loss in any market.
20251230_5089649