Dear Clients,
Happy New Year!
As we begin 2026, I want to start by saying thank you for your continued trust and confidence. It is a privilege to work with you and your family, and we truly appreciate the opportunity to help guide your financial decisions.
As we enter the new year, several key themes are emerging and are likely to remain front and center in the months ahead.
Is There an AI Bubble?
The most common question I continue to receive is whether we are in an AI bubble. While certain areas of the market have experienced strong price appreciation, the answer today is no, this is not a classic bubble. Many leading AI-related companies are delivering significant earnings growth and valuations, while elevated in some cases, remain reasonable relative to their long-term potential. There are areas of AI that remain highly speculative, with companies that have little to no earnings and operate with high leverage. Some of these businesses are unlikely to survive over the next few years. Investments in this space need to be approached with careful consideration and thorough due diligence.
With every revolutionary technology, there are peaks and troughs along the way. AI’s impact will unfold over many years, not quarters. We are only just beginning to see productivity gains across corporate America, and this trend is likely to accelerate through 2026 and 2027.
The Federal Reserve & the Economic Backdrop
Attention is also focused on the Federal Reserve, with a new Fed Chair expected to be announced this week. Markets are currently pricing in roughly a 28% probability of a rate cut in January.
The broader economic environment resembles a “Goldilocks” scenario:
Corporate earnings reflect this strength. In 2025, S&P 500 earnings grew by more than 12%, and estimates for 2026 point to approximately 15% earnings growth. While markets have climbed a “wall of worry” and posted strong gains, those gains have been supported by earnings, not speculation alone.
Valuations & Market Pullbacks
While some areas of the market have elevated valuations, others such as certain small and mid-sized companies appear more reasonable and even inexpensive compared to historical prices. A normal market correction of 8%–12% would not be surprising and, in fact, would be healthy. Market pullbacks are a natural part of investing and often create attractive opportunities for disciplined, long-term investors.
Washington State Tax Planning Considerations
Closer to home, many Washington residents are adapting to tax changes that took effect in mid-2025. Washington estate taxes now have a top rate of 35%, and capital gains taxes range from 0% to 7%, increasing to 9.9%. These changes highlight the importance of proactive planning. You can read more here: Washington State Tax Increases.
Additionally, proposals such as a potential millionaire’s tax aimed at individuals earning over $1 million remain under discussion. If enacted, the proposed rate is 9.9%. History shows that measures like these often expand to include lower income brackets over time, making it essential to stay informed and prepared.
Looking Ahead
As we enter 2026, the economic backdrop remains constructive. While valuations are somewhat elevated and market volatility should be expected, pullbacks are part of a healthy market cycle and often present opportunities. Washington residents have a variety of strategies available to reduce tax burdens and ensure a smooth transfer of wealth to future generations.
As tax season approaches, please look for your tax documents online. If you need assistance accessing your account or have any questions, do not hesitate to contact our team, we are here to help. If you would like to schedule a call, in person or via video, please let us know by email or phone. You may email us at [email protected] or call 425-709-0540 to schedule your appointment. The Nurse team is here to help, and Anne Chao, Anders (William) Forslund, and I would be happy to review everything so you are well positioned for the new year.
Thank you again for your trust and partnership. We wish you and your family a happy, healthy, and prosperous 2026, and we look forward to working with you in the year ahead.
Regards,
Spencer Nurse
The Nurse Team
Managing Director – Investments