Grey Owl Capital Management's commentary for the fourth quarter ended December 31, 2025.
“Expansion create opportunity.” - Anonymous
Dear Client,
The Grey Owl All-Season Strategy’s objectives are to minimize drawdowns, outperform short-term bonds by several hundred basis points each year (i.e., beat “cash”), and participate meaningfully in risk-on rallies. For the full year 2025, GOAS returned +11.4% and met each of these objectives.
We are particularly pleased with the strategy’s 2025 performance given how the year began. While the popular “Magnificent 7” group of stocks declined roughly -30% from its December 17, 2024 peak to the April 8, 2025 low, the Grey Owl All-Season (GOAS) portfolio was down less than -3% at its worst point in early April. The rebound that followed was rapid, and the year ultimately proved strong for most risk assets. GOAS managed risk during the drawdown and then repositioned to participate as conditions turned risk-on.
A few specifics below on the present environment and our current positioning, but first a more detailed review of the performance of the “primary” asset classes.
For the full year 2025, gold gained +63.7%, global equities rose +22.4%, U.S. equities followed closely at +17.7%, commodities increased 5.9%, and long-dated U.S. Treasury bonds returned +4.3%.
During the fourth quarter of 2025, precious metals continued to shine, with gold up another +11.5%. U.S. equities gained +2.7%, while global equities performed slightly better at +3.3%. Commodities were essentially flat, up +0.4%, and long-dated U.S. Treasury bonds declined -1.0%. Over this period, GOAS delivered a respectable +2.4% return.
As 2026 gets underway, a more dramatic shift may be developing. In 2025, technology and growth outperformed the broader market (i.e., the Nasdaq beat the S&P 500, finishing up +20.8%), while small-capitalization stocks lagged, ending the year up +12.7%. That dynamic has changed meaningfully during the first three weeks of 2026.
As of the close on January 23, 2026, the “Magnificent 7” group was down -3.6% from its October 29, 2025, high and -0.5% year-to-date. In contrast, small-capitalization equities and commodities are significantly outperforming, up +7.6% and +7.4% year-to-date, respectively. GOAS is aligned with these prevailing conditions and is up +5.3% through January 23, 2026.
In short, our diversified, risk-managed approach delivered solid double-digit returns in 2025 while avoiding major drawdowns during early-year volatility. Today, we are positioned for meaningful economic growth in the U.S. and much of the rest of the world. We believe conditions now favor cyclical outperformance and a broadening of equity participation. That means overweight exposure to commodities and smaller-capitalization equities. As the charts below indicate, this phase may only persist through the first half of 2026. For now, that is the prevailing condition regardless of how long it lasts. We are prepared to adjust as conditions evolve.
Economic Growth
Hedgeye’s real GDP projection model shows a reacceleration in growth gaining significant momentum in the first quarter and continuing through much of the second quarter. As growth has accelerated, cyclical equities and commodities have outperformed. While this acceleration continues, we expect risk assets to continue performing well.
Figure 1 – GDP Projections (www.hedgeye.com)
Economic growth is accelerating, which historically supports risk assets—particularly cyclical equities and commodities.
Inflation
Inflation expectations have been decelerating for several quarters, as evidenced by the five-year breakeven spread—often referred to as “the market’s” inflation forecast.
Figure 2 -5-Year Breakeven www.tradingview.com
Hedgeye’s CPI model corroborates this trend, projecting continued disinflation through the second quarter of 2026, followed by only a modest seven-basis-point increase in the third quarter. Combined with accelerating growth, this backdrop is favorable for risk-taking.
Figure 3 – Inflation Projections (www.hedgeye.com)
A key driver of lower inflation has been the price of oil—one of the few major commodities not yet firmly in a bull market.
Figure 4 -US Crude Oil Spot www.tradingview.com
Inflation pressures remain contained, creating a favorable backdrop for risk-assets.
Broadening US Equity Market
While the broader macro environment—accelerating real growth alongside disinflation—is critical to the rally’s expansion, sector-level dynamics are also playing an important role. Mega-capitalization technology companies are now facing more difficult year-over-year comparisons, as cycle-peak artificial-intelligence capital expenditures may be behind us, pressuring both revenue growth and margins.
The opposite is true for much of the rest of the market, particularly smaller-capitalization and cyclical businesses. With easier comparisons to last year, both revenues and margins are improving.
Hedgeye data show that while S&P 500 earnings are expected to continue growing, a greater share of that growth is coming from the “other 493” stocks.
Figure 5 – Earnings Projections (www.hedgeye.com)
Market leadership is expanding beyond mega-cap technology, increasing opportunity across smaller and more cyclical companies.
Market Signals
Last quarter we wrote:
Market internals also point to change beneath the surface. While large-cap indices hit new highs in the third quarter, participation was narrow—signs of enthusiasm were limited. In October, that pattern began to broaden as Buying Power improved and Selling Pressure eased. With Buying Power still stronger overall, we do not see a shift toward a risk-off environment. Instead, the data suggest equity markets are transitioning as investors respond to—and anticipate—changes in growth and inflation, opening the door for new leadership among sectors and styles.
That improvement and broadening has continued. Selling Pressure is receding, and Buying Power shows further signs of strengthening.
Figure 6 – https://www2.lowryondemand.com/members/markets/marketchart.cfm
More granular market data look even better. Lowry’s writes:
While many investors and the financial media are focused on the cap-weighted price indexes, the Lowry Analysis is predominantly centered on the full market on an equal weighted basis, which is dominated by smaller stocks. The reason for this is simple: the greater the number of stocks participating in a market advance and displaying promising Demand trends, the more difficult it is for sellers to take control of the market. While such features do not make the market impervious to pullbacks, recent evidence continues to mount in favor of a broad and durable advance. Still, we would like to see these improvements reflected in our longer-term measures of market health to solidify our conviction in the bulls further.
In their most recent weekly report, Lowry’s emphasized the dramatic increase in the percentage of stocks within 2% of their 52-week highs.
Figure 7 - https://www2.lowryondemand.com/members/markets/marketchart.cfm
Explaining the chart, Lowry’s wrote:
One method to view how many stocks are carrying the performance load within the market is our measure of Demand intensity, or the Percent of OCO1 Stocks At or Within 2% of 52-Week Highs. This is one of the more sensitive indicators in our suite, and on January 15, it reached a one-year high of 33.36%. While this was an impressive development, the indicator moving above its multi-month range is perhaps even more important. It essentially reflects a change in character within demand intensity from good to great, as the OCO Index is dominated by smaller stocks. The more stocks that reach new highs, the stronger the market’s constitution ultimately becomes.
Market internals support the case for a broader, more durable advance.
Current Positioning
Our current portfolio remains balanced within an all-season framework but is more aggressive than when we last reported in October 2025. Since last quarter, we have increased exposure to U.S. small-capitalization equities, expanded global equity exposure—particularly in emerging markets—and added to precious metals and commodities. Fixed income and cash allocations declined from 28% to 16%.
Figure 8 – GOAS Allocation
This positioning maintains meaningful protection against inflation or market stress while remaining tilted toward growth. This balance—rooted in our all-season philosophy and adjusted for present conditions—reflects our core belief: don’t try to predict the future; position with prevailing conditions while diversifying to enable success across many possible futures.
The portfolio remains balanced but is intentionally tilted toward growth.
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As always, if you have any thoughts regarding the above ideas or your specific portfolio that you would like to discuss, please feel free to call us at 1-888-GREY-OWL.
Sincerely,
Grey Owl Capital Management, LLC
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