Markets Struggling To Ascend ‘Wall Of Worry’
The only thing that looks clear in markets at the moment is its inability to price the major transitions afoot: a move from a unipolar world order to a multipolar one, AI disruption (good for some industries, bad for others – depends on the day), and societal friction that has engulfed politics, demographics, and financial status. For several months, the S&P 500 has been directionless, and its daily behavior has become increasingly erratic. Within the past week, we’ve seen the AI disruption story ripple its way through CRE Brokers, Office REITs, Insurance Brokers, payments, Fintech, and transportation/logistics, as each of these industries endured a 5-15% intraday correction with the release of a new AI model threatening their business models.
What stood out most over the past week is not so much the heavy selling pressure in these industries found in the AI crosshairs, but rather the complete lack of willingness from investors to step in and provide support during any of these sharp sell-offs. Admittedly, it's unnerving to see names previously thought of as AI winners getting rethought and reassessed for potential risks in real-time. To state the obvious, this is raising the uncertainty level, which is confirmed by the VIX trading above the 22 level and weighing on sentiment.
Last week, the S&P 500 posted its worst week since November 7th as it slid -1.4%, with the world's largest index still lower than where it closed at the end of October. Weighing on the index are three of its largest sectors, all of which were expected by the consensus to continue to lead us higher throughout 2026; over the past three months, Tech (-5%), Consumer Discretionary (-3%), and the Financials (-2%) are all in the red. The tech-heavy Nasdaq continued to break down as it slipped further below its 50-day moving average after declining -2.1% last week, and is now down -3.0% year to date (while marking a fifth-consecutive weekly decline, its longest such losing streak since May 2022). The Tech-heavy composite has made zero headway since mid-September.
I would submit that it's foolish for anyone to think they know with a high degree of certainty how this plays out in markets. My advice is to be a sponge. Listen and learn from any and all sources, but most importantly, keep an open mind. We are in a more volatile phase of the bull market in U.S. equities, with a visible lack of a clear market trend in the S&P 500, coupled with sector rotation toward more defensive names, driven by AI-disruption fears affecting a wide range of sectors. This is a new feature to the marketplace and makes the investment landscape that much more challenging.
The absence of a clear market trend and escalating fears of AI disruption are now affecting an increasing number of groups. Investors are moving away from the “AI lifts all boats” growth story and are beginning to distinguish likely winners from potential losers. In the Russell 1000 this year, energy equipment and semiconductors are up ~30%, while software and healthcare tech are down more than 20%. Furthermore, over the past few months, more than $1 trillion in market value has been wiped off the mega-cap Tech companies that have invested the most in AI. The MAG index has fallen back to range lows and is trading just above the 200-day moving average (see the chart below). The key line in the sand is 25k, with the 100-day now rolling over and turning negatively sloped.
Even Alphabet (GOOGL), the lone untarnished MAG7 member, broke its uptrend last week. There's no longer any mega-cap Tech stock in what technicians would call an "uptrend."
As of Friday’s close, all eight of the mega-cap Tech and Tech-adjacent stocks are now below their 50-DMAs. This is a major reason why the S&P 500, which is heavily concentrated in these names, hasn’t been able to make any headway year-to-date, while the S&P 500 equal-weight index is up more than +5%.
Who knows, maybe opportunity is knocking in this space, but it's not for the faint of heart. For example, Microsoft (forward P/E of 23x) now trades at a lower forward multiple than IBM (forward P/E of 24x) for the first time in over 10 years.
In addition to the price action, another thing I found interesting last week was yet another marker on the ‘good news, bad price action’ lens through which I’m viewing the market. As a refresher, coming into the year, the widely espoused consensus view was that economic and earnings growth would be strong, inflation would be cooperative, the Fed would continue to be accommodative, and the combination of fiscal stimulus via tax cuts and deregulation would propel risk assets higher. The year is still early, so it's unfair to judge the results, but I was skeptical given how lopsided sentiment and positioning had become in expressing this view coming into 2026. Well, it does say something that the market reaction to last week’s better-than-expected nonfarm payroll and CPI report was little more than a yawn, if not a sell-the-news event.
The same can be said for the fact that YoY S&P 500 earnings growth for Q4 (with more than three-quarters of the corporate results in) is so far running at +12% compared to the +8.4% consensus estimate at the start of the reporting season – and yet the S&P 500 is 155 points (-2.2%) below where it traded on January 12th (the close before JP Morgan kicked off Q1 earnings on January 13th). On a fundamental basis, the bull camp is getting exactly what you would want to see from incoming data, yet the price action isn’t following suit. Or maybe much of this good news was front-loaded with the S&P 500 ending 2025 with a forward P/E multiple of 22x, near the high end of the range over the past decade.
One area that responded to the solid CPI print and a jobs report showing a labor market that, while stabilizing, remains mired in a ‘low hire, low fire’ backdrop was the bond market. The 10-year T-note yield plunged -18 basis points to 4.04%, and the long bond declined -16 basis points to 4.69%. Don’t look now, but the 10- and 30-year Treasury bonds are outperforming the S&P 500 year-to-date, with the 30-year up almost 3% through the first six weeks of the year.
The bond market knows that the January jobs report wasn’t as glowing as the headline suggested, and even with many Fed officials still barking a hawkish tone, investors are aptly blocking them out and now the futures market is pricing in 8% odds of a March 18th rate cut (from 6% pre-CPI report), 30% for the April 29th meeting (up from 27%), and 86% for June 17th (versus 79%). If there is a negative with the moderating trend in recent inflation readings, it is in a metric known as “sticky” prices (essentials), which rose a hefty +0.4% month-over-month in January and are up +3.0% year-over-year. That’s an elevated level, but lower than the cycle peaks. Where it creates a problem is that it adds to the ‘affordability’ crisis within the U.S., in that this +3.0% YoY trend is on top of a cumulative +50% increase in the prices of basic necessities of life over the prior five years. You can see why this has become a ‘hot button’ issue heading into the midterms and is going to be a thorn in the side for any incumbent running for reelection. Disinflation is not exactly helping those at the lower rung of the ‘K’ redress their cost of living situation today compared to where it once was.
Humor me as I touch on a couple more thoughts on last week's payroll report. Putting aside the +130k headline print and tick down in the unemployment rate to 4.3%, what stood out to me was seeing the pace of job creation revised down a massive -69% in 2025, with 2024 marked down by -28%. As if that wasn’t troubling enough, when you strip out health and education (non-cyclical sectors) from the 2025 tally, you have a labor market that contracted by 517k jobs in 2025. The following chart from the FT sums it up well, where, when you exclude the healthcare sector, the U.S. economy has actually had negative job growth since 2024. In what world is that a vibrant and robust job market? And this is before AI threatens to take the job of everyone still remaining in the workforce (yes, that’s sarcasm, but not too far off what current headlines are running with).
So, take the January +130k print with a grain of salt, because there is a 100% chance it gets revised. Go back to January 2025, when the initial release reported +143k jobs created. After multiple revisions, we now see that it came in at -48k. For all of 2025, what we had thought before last week’s revisions was an average monthly gain of almost +50k is now reported at +15k. Outside the 2020 pandemic year, this was the weakest performance since coming out of the Great Recession in 2010. It continues to blow my mind the way traders and commentators react to these data releases in the moment, as if they are etched in stone, when the reality couldn’t be further from the truth.
Let me close this note with some thoughts on how I’m thinking about markets at the moment. I remain concerned about bullish sentiment and positioning data, although I acknowledge that nearly three months of sideways chop in the S&P 500 has dialed this back to some extent. The VIX persistently holding around the 20 level has prompted substantial de-grossing among hedge funds and systematic traders, another constructive development from a contrarian standpoint. Valuations, while rich, aren’t unjustified in my view if the S&P 500 continues to rack up double-digit EPS growth, which it has done for five consecutive quarters, and what is expected for full-year 2026. Do I think this restrains some upside? Yes, but it's hard to get negative on U.S. equities with earnings clipping along like they are. If this changes, it will matter, but until then, take comfort that it is occurring at a time of significant and rapid change.
What we also know now, as of mid-February, is that this AI revolution is real, likely very disruptive, and almost impossible to model out in any industry without a robust error term. It seems like it was only 12 months ago that the widespread narrative was that generative AI would be a combination of a panacea and a tide that lifts all boats. Fast forward to the present day, and this narrative has shifted to AI representing an emerging threat through wide swaths of the Tech space and an array of other sectors. Meanwhile, the most shunned trades of 2023, 2024, and 2025 – like Treasuries, Energy, and Consumer Staples – have emerged as market leaders so far this year.
Furthermore, the volatility hasn’t been relegated to just the stock market, as the precious metals space can attest. At one point, gold was up more than 20% for the year when it spiked above $5,500/oz to only correct by nearly 20% in short order to just under $4,500 before recently finding its footing and consolidating around the $5,000/oz level. Silver’s price action was even more severe, with it up nearly 70% on the year at the end of January, to then crash by nearly 50%, and currently sits at +3% ytd. Then there is Bitcoin, which has seen its price halve from last fall’s record peak with no obvious catalyst to attribute to its fall. This shows what history has always proven, which is that overcrowded trades are vulnerable to turbulence on even the slightest shift in investor sentiment.
As for the Mag7, I continue to believe they deserve the benefit of the doubt. If their company histories show us anything, it is that they have proven to be prudent stewards of shareholder capital – it’s a big reason why they all reside in the $2 trillion market cap club. Nevertheless, history has also shown that no company has remained atop the market cap peak forever: in the 1960’s it was AT&T until IBM supplanted it in the 1980’s, then it was General Electric and Exxon Mobil vying for the top post until Apple, Microsoft, Nvidia, and recently Alphabet shared the limelight. So while I hold the view that this capex splurge by MegaCap Tech will likely generate an adequate return on investment on the other side, I’m not certain that is the case. Especially when I see Tech heavyweights in China frequently releasing open-sourced AI models nearly as good as those released by US tech companies for a fraction of the cost.
This brings me to foreign equity markets, which continue their trend from 2025 of outpacing U.S. equities. Year-to-date, the iShares Eurozone ETF is up by nearly +6.0%, the iShares MSCI U.K. ETF has advanced by nearly +8.0%, and wide swaths of Asia have already returned double-digits – Korea (+35%), Japan (+14%), Taiwan (+15%), and Thailand (+12%), to name a few. It says something when the “laggards” like Hong Kong, Singapore, and China are “only” up around +4% to +6%. That puts the flat ytd performance in the S&P 500 into perspective – not to mention that these other geographies carry with them firming currencies. The chart below plots the price performance of the S&P 500, Europe, Japan, and Asia ex-Japan going back to the start of 2025, with the S&P performing well, but materially lagging behind. Keep in mind that a weakening greenback has played a significant role in this huge outperformance – the greenback is down by about -15% from its 2022 peak, adding more alpha to the returns garnered on the foreign equity position.
Even after the huge outperformance of the ex-U.S. stock market relative to the United States, many investors are still waiting for U.S. exceptionalism (U.S. equities outperforming the world) to reassert itself. Admittedly, the thought sticks in the back of my mind as well, and this is with us having client capital ambitiously exposed to global equities. But if the chart below is any indication, and this structural pivot (from a unipolar to a multipolar world, a shift from globalization to mercantilism, and a reassertion of supply chain redundancy over efficiency) is truly underway, then there is much more to go before this line mean-reverts. Let me give you an arithmetic example of what a statistical mean reversion would look like: if the S&P 500 were to merely stabilize, that would imply a doubling in the RoW (“Rest of World”) index before we got to a full mean reversion. We intend to stay globally diversified for many years to come.
As for gold, we continue to be long-term structural bulls, but our base case remains that the shiny metal needs to consolidate after the huge run-up and subsequent pullback from all-time highs. For now, we’re just holders of our current exposure as we hope a necessary consolidation is underway. If the price were to dip down to $4,600/oz or lower, we would consider and likely take action to add back the exposure we sold when gold traded above $5,400/oz.
Beyond gold, we continue to favor the energy sector, including natural gas equities, copper miners, uranium, uranium miners, and equities linked to the power grid, which is currently inadequately supplied to meet future energy demand. Call us bulls on the periodic table at large and various derivatives of it.
The articles and opinions in "Capital Market Musings and Commentary" are for general information only, and not intended to provide specific investment advice. Performance, dividends and other figures have been obtained from sources believed reliable but have not been audited and cannot be guaranteed. Past performance does not ensure future results. Investing inherently contains risk including loss of principle. Advisory services offered through Casilio Leitch Investments, an SEC registered investment advisor. Copyright © 2023 Casilio Leitch Investments. All Rights Reserved.