So much, too fast?

Several of our 2026 Year Ahead targets were already reached in the first month of the year. I’m not complaining, it’s just that, as we wrote in a January Alert, hitting targets should be a trigger to review portfolios. After big moves, our strategy is to use our scenario analysis framework to rebalance, diversify, and hedge. 

The start of this year has been characterized by a high degree of geopolitical uncertainty, but there have been enough “good things” to keep major equity indices near all-time highs. Nonetheless, the potential downside risks for portfolios have grown, in our view.

AI capex has been a “good thing” for US growth. But concerns are rising that capex is now growing too quickly and that it could present a risk to the bull market. Potential disruption to legacy business models from AI has also weighed on equity values in industries ranging from software and IT services to insurance and travel brokers. Some investors are asking, “maybe fears of AI eating software alive are overblown, but if the world is so uncertain, why pay 20x revenues when I can buy emerging markets at 16x price-to-earnings, a 2% yield, and diversify my currency exposure?” In bond markets, issuance to fund some of this AI capex is drawing comparisons with the dotcom era. More broadly, the continuing large scale of government debt issuance is prompting concerns over the cost of capital, potentially higher inflation, and debt sustainability. In this letter, I look at these and other risks, and what to do about them. 

But let me give you the executive summary: 

We live in a multi-polar world where multiple heads of state or governments are picking corporate winners and losers as they vie for control of critical resources and technology chokepoints. The world’s largest companies are doing the same in a race for AI supremacy that, so far, is not driven by clear economic returns. Military threats are evolving as more countries and non-state actors deploy a growing number of missile and drone strikes across the globe, also threatening critical resource and infrastructure chokepoints. Markets have never been about purely rational economic analysis, but we are at a point in history where a great deal of what moves markets is beyond traditional financial analysis. 

One predictable part that can be explained through finance is the increased use of leverage (debt), both public and private, to finance it all. Leverage will amplify the volatility in all asset classes touched by these larger forces as our unpredictable multi-polar future unfolds. If investors use that volatility to diversify, rebalance, and hedge their portfolios, I believe they will do better than average and should prosper. If they choose to take cover in too much cash or over-concentrate in individual stocks and their home markets, they risk doing much worse than average.

Overall, we maintain a positive outlook on global equity markets, underpinned by resilient economic growth, supportive monetary and fiscal policies, and robust earnings growth. We continue to like the US equity market, but see opportunities for investors to diversify beyond technology into other US sectors such as industrials, consumer discretionary, utilities, health care, and banks. More broadly, we believe Europe, Japan, China, and emerging markets offer attractive prospects. Investors should use a positive global backdrop to address country or regional biases in equity portfolios. Investors should also make sure they’re well-diversified across asset classes, and consider portfolio hedges. We continue to like exposure to quality bonds and gold.