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FBB Capital Partners 4th Quarter Newsletter, 2025: AI Bubble, Recession, or Growth?
January is a time to reflect and look forward to the year ahead. From market lows way back in the fall of 2022 when headlines exclaimed “the 60-40 portfolio is dead” through the end of 2025, the AI unveiling and capital investment bonanza that followed has elevated markets (and the 60-40 portfolio) higher than anticipated just three short years ago.
Our sense is the AI surge and broader market performance may see some moderation this year, especially if history is a guide. In this quarterly letter, we’ll examine challenges and opportunities facing investors, including upside and downside scenarios for AI stocks and the broader economy.
AI: Bubble or Bonanza?
The surge in AI-related stocks is fueling a debate on what could pop a potential bubble in the tech sector. Some bears point to so-called circular financing, where company A invests in company B, and then company B turns around and uses this cash to buy company A’s products. This type of complex vendor financing could be hitting the gas on the AI buildout now but could also slam on the brakes if demand falters.
Separately, history suggests that “hype cycles” such as the dot-com boom tend to overshoot. However, if AI stocks are in a hype cycle now, historical patterns also suggest that it may be difficult to pin down the inflection point when growth turns to decline. We have some concerns for companies highly concentrated in the AI data center buildout, compared to more diversified tech or industrial companies that may better withstand a slowdown in AI growth.
Turning to a more bullish view, we may still be in the early innings of a tech wave where AI tools drive significant economic growth through increased productivity. What’s more, we’re hearing from companies that they are struggling to build AI data centers fast enough, implying healthy underlying demand.
We’re also seeing measures of investor sentiment that, while above long-term averages, are well below prior tech booms, suggesting the downside could be less than in prior cycles. In sum, we believe it’s important to have some exposure to AI companies, but as active managers we are constantly re-evaluating downside risk and upside potential.
Recession or Growth?
While AI-related spending is supporting the tech sector and data center construction, many investors are wondering if less favorable factors could tip the broader economy into a recession. The two most likely recession triggers in our view are potential increases in inflation, which is running hotter than the pre-Covid era, or unemployment, which has been climbing gradually since early 2023.
Despite these risks, recent policy changes are putting downward pressure on taxes and interest rates, creating an environment that may keep the economy humming while offsetting elevated inflation and job market strains. Data from the Federal Reserve Bank of New York suggests a 25% chance of a recession this year, which seems to support this more favorable scenario for the economy.
To be fair, there could be some external supply or demand shocks that change the picture for economic growth this year. The U.S. economy overcame surprising tariff policies in 2025, but 2026 could see other unexpected events that either help or hurt economic growth.
Positioning for the new year
Investing for the long term requires acting in the short term. While some investors consider reducing stock or bond exposures amid worries over an AI bubble and a potential recession, we continue to favor balanced portfolios that minimize cash and maintain exposure to both stocks and bonds.
Our base case anticipates modest expansions in both the economy and stock market this year. Our sense is equity performance could track earnings growth in the high, single-digit to low, double-digit range, though slightly lower investor sentiment may weigh on total returns.
Outside the U.S. we see opportunities for diversification into less expensive stocks, with a caveat that earnings growth tends to be lower abroad. A weaker U.S. dollar benefited international stocks in 2025, and we will continue to keep a close eye on currency movements as 2026 unfolds.
Looking ahead, our ongoing rebalancing into bonds during the recent equity bull market gives us the option to take on more equity exposure if there is a domestic or international market correction. Speaking of bonds, we continue to favor high quality government and corporate securities, offering ~4-5% yields. While additional Fed rate cuts may lead to lower overall interest rates, we expect these issues to have positive real returns over the course of a cycle.
While investors continue to wrestle with questions about a potential AI bubble and a possible recession, we take a longer view and prefer a fully invested approach that avoids market timing. By owning the stocks and bonds of companies that are growing and gaining market share, we strive to compound wealth over time, while remaining ever mindful of your long-term goals and objectives.
Wishing you a prosperous and healthy New Year.
Michael Bailey, CFA
Director of Research
Michael Mussio, CFA, CFP®
President
Women & Finance: Will You Still Need Me, Will You Still Enroll Me, When You’re 64?
As your 65th birthday approaches, turning 64 is the perfect moment to start getting your Medicare plans in order. Beginning early takes the stress out of the process and ensures you know exactly what to expect when the time comes. And don’t be surprised, once you turn 64, you’ll likely start receiving Medicare solicitations in the mail almost daily. It’s a good reminder to understand your options clearly so you can separate useful information from noise.
The first step is simply knowing your timeline. Medicare gives you a seven-month Initial Enrollment Period, which begins three months before the month you turn 65. While you technically have seven months to enroll, most people find it easiest to start during those first three months so that coverage begins smoothly without delays.
Next, it’s important to understand whether you need to enroll right away. If you’re already receiving Social Security, Medicare Part A and Part B will enroll you automatically. But if you’re still working at 65, your decision depends on your employer’s health coverage. Larger employers (those with 20 or more employees) often allow you to delay Medicare without penalty. Smaller employers generally do not, meaning Medicare becomes primary at 65 and enrolling on time is key.
However, there is one situation where not enrolling in Part A at 65 may be the right choice and that is if you’re contributing to a Health Savings Account (HSA). Once you enroll in any part of Medicare, you can no longer make HSA contributions, and Medicare can even enroll you retroactively for up to six months. If you want to keep contributing to your HSA and still have qualifying employer coverage, hold off on Part A until you officially retire.
When it comes to choosing your actual coverage, you’ll decide between Original Medicare (Parts A and B), often paired with a Part D drug plan and typically a Medigap policy, or a Medicare Advantage plan (Part C), which combines hospital, medical, and often drug coverage into one plan. Comparing these options can feel overwhelming, but Medicare makes it easier with its Plan Finder tool: https://www.medicare.gov/plan-compare
Your prescriptions also play a role in your decision making. Before you compare plans, make a list of your medications so you can check how each plan covers them, what your copays might be, and whether your pharmacy is preferred.
If you’re leaning toward Original Medicare, it’s wise to understand how Medigap, also called supplemental insurance, works. You get a six-month guaranteed-issue window when you first enroll in Part B. During this time, you can buy a Medigap plan without answering medical questions. If you start with a Medicare Advantage plan and switch to Original Medicare later, you may have to go through medical underwriting and that can mean health questionnaires or even a physical exam. Approval is not always guaranteed.
Another good step is to check whether your current doctors accept Medicare or participate in the networks of Medicare Advantage plans you might be considering. This helps avoid an unexpected provider change once you’re enrolled.
Lastly, keep an eye on something many people don’t hear about until it’s too late: IRMAA, the Income-Related Monthly Adjustment Amount. If your household income is above certain IRS thresholds, you may pay an additional amount on top of your regular Medicare Part B and Part D premiums. IRMAA is based on your tax return from two years prior, but if your income has dropped because you retired, you can appeal the surcharge with Social Security.
Preparing for Medicare doesn’t have to feel complicated. By starting at 64, you give yourself plenty of time to understand your options, compare plans, and make confident decisions tailored to your health and finances. And if you need guidance along the way, your financial advisor or a Medicare specialist can help you navigate everything with clarity and confidence.
About the Author: Maggi Keating, CFP®
Maggi brings over 24 years of financial industry experience to her practice. Maggi values her client relationships and delights in her role as an educator to her clients, helping them create tangible goals for their financial life. Prior to joining FBB Capital Partners, Maggi spent 12 years at Charles Schwab & Co., Inc., specializing in assisting families and high-net-worth individuals and foundations. Maggi holds a Bachelor of Science degree from Radford University and is a Certified Financial Planner® practitioner and a NAPFA associate with the National Association of Personal Financial Advisors (NAPFA). Maggi and her husband Pete, a retired Marine Corps Colonel, live in her native Virginia. As the parent of two children, Maggi is very active in their sports activities.
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FBB Capital Partners [“FBB]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from FBB. FBB is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the FBB’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.fbbcap.com. Please Remember: If you are a FBB client, please contact FBB, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your FBB account holdings correspond directly to any comparative indices or categories.
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