Quarterly Letter January 2026
Written January 5th, 2026
THALASSA CAPITAL LLC
“I am not afraid of death; I just don’t want to be there when it happens.” Woody Allen
A very eventful year has ended and delivered to investors large gains that were unexpected at the start of 2025. Volatility was the name of the game as trade policy and geopolitics broke with established protocols and a new world order, for better or worse, seems to be on its way.
Equities fared very strongly on the back of sustained capital expenditures in AI and overall strong earnings. Indeed, just about 85% of equity returns seems to be explained by increased earnings, an inversion of the trend of the previous two years when multiple expansion was a major factor. The forward PE for the SP500 currently stands at 22x, one of the highest in the last 25 years (in March 2000 just before the tech bubble burst, the multiple stood at 25x), which suggests that probably additional equity gains must continue to rely on earnings.
Wall Street euphoria stands in contrast with the somber mood on Main Street. Consumer confidence is at historical lows despite muted level of unemployment and a reasonably stable inflation rate. There are a few factors that may explain this divergence, but the main one may reside in the large inequality we are witnessing in our economy. The top 20% of income brackets are seeing the best improvements in their financial situation while the rest is facing a much more stagnating reality. From an investor’s perspective, it is interesting to note that the average 12-month subsequent return of the SP500 after a consumer sentiment through is a strikingly positive 24% (source: JP Morgan Guide to the Markets).
Bonds performed reasonably well and provided returns generally uncorrelated to equities, a great bonus in asset allocation models. In terms of hedgers, we should be remiss if we didn’t mention the great run of gold driven by geopolitical chaos and global central banks accumulation as the US Dollar initiated a depreciation which may run for quite some time.
But that was the past and now we need to focus on 2026. As we mentioned earlier, equity valuations are near historical highs; however, that is due mostly to the Magnificent Seven and generally AI related companies. There are still a few pockets of undervalued opportunities in the markets and in the next twelve months we may start to see a rotation from growth to value. For example, we have been positive on pharmaceuticals and biotech companies for quite some time and last year, we finally saw institutional money flowing back into this space. This is a trend we would expect to continue.
We also continue to look positively at international equities, in developed and emerging markets, as a strong diversifier.
In the last couple of years, investors (including us) have kept unusually higher cash balances due to the high interest rates that this risk-free asset was paying after decades of essentially zero rates. However, rates have started to come down, and yields have become less attractive. We believe it is time to increase bonds exposure where good yields are still available and where one may be able to also pick up rises in the value of the principal. In this context, we tend to favor high quality, intermediate duration bonds including high quality municipal bonds.
We are more cautious about credit markets and lower quality corporate bonds. As the economy slows down, lower quality issuers might face cash flow problems and passive investors that may have financed borrowers indiscriminately will probably underperform.
As far as REITs are concerned, we believe it’s a story of sectors. Health Care and Senior Housing should continue to outpace averages. Data Centers will continue to do well if hyperscaler tenants (Alphabet, Met and Microsoft) will continue to spend; so far they have indicated that capex in 2026 will be even higher than in the past 12 months. Industrials are expected to underperform given low supply barriers in many markets and a possible decrease in global trade and in economic activity in general. Office space, a sector we have not liked for a while, might bifurcate between high performance in quality markets like New York and underperformance in depressed or changing economic areas. We are neutral on Single Family Rentals and continue to have a negative bias for Malls.
In conclusion, we feel that 2026 may provide more opportunities for active decision making and vigilant risk management.
As always, we would like to thank you for your renewed confidence in our work,
Youri Bujko
Davide Accomazzo