March 2026 edition

Key takeaways

• Markets remain resilient, even as AI disruption and policy uncertainty contribute to a widening gap between winners and losers.
• This is no longer a one trade market. Leadership is broadening as rotation replaces concentration, and the dynamics that worked over the past decade are becoming less reliable.
• Diversification is back in focus, supported by broader equity participation and fixed income acting as a consistent counterbalance.

A fast-moving narrative shift

The carousel of concerns is spinning at full speed. As has been typical this cycle, the market narrative has shifted abruptly. After much of 2025 was defined by enthusiasm, and at times excess, around artificial intelligence (AI), the focus has swung toward disruption. Investors are increasingly asking which business models may be vulnerable, starting with software but extending well beyond it.

Every major technological shift brings both excitement and anxiety. What makes this one different is the pace. AI is advancing faster than prior major technologies, pushing markets almost 180 degrees, from worrying about an AI bubble to worrying about displacement. Historically, however, periods of creative destruction make it far easier to identify potential losers than to recognize, in real time, the new companies, industries, and opportunities that ultimately emerge.

Putting AI fears in perspective

Layered on top of these concerns is a more existential fear that AI could meaningfully displace white collar jobs. Each day seems to bring a new viral doomsday article, often followed by a rebuttal or more nuanced take. The reality is that the future is always uncertain and if investors were consistently positioned for worst-case outcomes, they would never stay invested.

To put this in perspective, consider COVID. If investors had been told in advance about a global pandemic, millions of deaths, and an abrupt economic shutdown, moving entirely to cash would have seemed prudent. Yet after the shortest recession in history, markets staged one of the strongest rallies on record. The lesson is not that risks do not matter. It is that markets discount far more, and far faster, than we often appreciate.

Emerging research also suggests the AI narrative may be more balanced than the extremes imply. A recent Federal Reserve Bank of Dallas note highlighted that AI’s impact on labor depends on whether it automates tasks or augments them. Early evidence suggests it is doing both:

• In some cases, tasks are automated, and jobs are eliminated.
• In others, AI removes routine work, allowing companies and workers to focus on higher value activities, improving productivity and wages.

In practice, the same innovation can be both disruptive and additive, depending on how it is applied.

Policy noise amid a volatile backdrop

Against this backdrop, investors also faced renewed policy and geopolitical uncertainty. A recent Supreme Court ruling struck down parts of the administration’s tariff framework, prompting a shift to alternative measures. The net effect appears modest, with effective tariffs now slightly lower than before the ruling.

That said, we do not see this as a game changer. Unlike the tariff shocks of 2025, companies have had time to adjust, supply chains are more resilient, and markets appear less prone to reflexive reactions.

Geopolitical tensions resurfaced late in the month following a joint U.S.–Israel strike on Iran. Historically, similar events – from prior strikes on Iran to the capture of Venezuela’s Maduro – have had only short-lived market impacts, though this episode warrants closer attention, particularly through the lens of oil prices. Together, these factors point to elevated volatility, consistent with a midterm election year.

So, what are investors to do?

Periods like this bring us back to the basics of diversification.

For years, many investors asked a reasonable question: why own anything other than the S&P 500? Why own small caps, international stocks, non-tech sectors, or even bonds? The answer is becoming clearer in today’s market.

As we discussed in our annual outlook, we expected broader participation, and that is what we are seeing, supported by a broadening earnings backdrop.

A wider opportunity set

While we remain constructive on U.S. large caps, the opportunity set has widened meaningfully. The recent Middle East flare up also reinforces the need for portfolio diversification and is consistent with our up-in-quality preference within fixed income.

• Over the past year and a half, we have been increasing our outlook on international markets. We upgraded emerging markets to neutral in January following an important technical breakout and improving earnings trends.
• International developed markets have also moved to record highs after breaking above long-term resistance. This is another sign that the bull market has become increasingly global.
• Small- and mid-cap stocks have been outperforming as investors anticipate an economic uptick.
• Sector leadership has broadened, with areas perceived as less vulnerable to AI disruption, or more leveraged to economic growth, showing relative strength. Consistent with this backdrop, we upgraded cyclicals in December.
• In regard to technology, we continue to give the sector the benefit of the doubt while closely monitoring earnings and price trends. Forward price-to-earnings (P/E) multiples have declined by more than 20%, and technology now trades at its lowest premium to the broader market since 2000.
• On the fixed income side, bonds have behaved much like the “consistent hitter” we discussed in our annual outlook, providing diversification during equity pullbacks. With pockets of stress emerging in software and parts of the private capital market, we continue to emphasize quality, particularly given how little incremental yield investors receive for reaching down the credit spectrum.
• Longer term, we still view gold as a valuable portfolio diversifier, supported by central bank buying and ongoing geopolitical risks, including tensions involving Iran. However, after a significant run, we downgraded gold to neutral in January near the highs.

Bottom line

AI disruption is real and moving quickly. It creates meaningful risks, but also meaningful opportunities. From a positioning standpoint, this environment argues for going back to the basics – diversification is working again. We will continue to follow the weight of the evidence, remain disciplined in our process, and adjust positioning as that evidence evolves.