Bobbing and Weaving

In times of extreme swings in markets - with one day exuding optimism and the next few feeling like the sky is falling - it’s extremely challenging to formulate a plan for your portfolio. Things could change on a dime.

But investing isn’t about changing your positioning on a dime. It’s about setting yourself up for the best outcomes over time. The real question right now is: Has the longer-term thesis changed enough to warrant a more structural change in portfolio positioning?

In some ways, yes, there are positioning tweaks that can be made. Let’s dig into where.

2026 Outlook, Revisited

Coming into this year – pre-Iran war, pre-Venezuelan President capture – our outlook didn’t highlight Energy stocks as an opportunity or a risk. The sector made up only 2.8% of the S&P 500 at the end of last year, and has grown to 4.0% as of the end of March. This is still small compared to Technology’s 30%, but Energy’s weight in the index has increased by 43% since the beginning of the year. That warrants some attention.

Even though Energy’s weighting remains very low historically speaking, there’s room for it to rise if the conflict has structurally changed things. And I’d argue that it has: The war has now lasted long enough for oil supply disruptions to bite, and infrastructure damage will likely keep energy prices elevated above pre-war levels for some time… even with de-escalation. That bodes well for Energy stocks to move even higher. Bottom line, we’d add Energy to the list of investment opportunities for the foreseeable future.

There are, however, spots in the market that have lost their luster as a result of this war, not least of which is Gold. I’ve been constructive on it for a few years, and that view has paid off even more than I expected. I haven’t changed my broader thesis on Gold as both a resurrected safe haven for central banks and a hedge against currency volatility. Nevertheless, there are elements of the current environment that should keep a lid on returns in the near-term, in my opinion.

First, emerging market countries have been some of the largest buyers of the precious metal in recent years, and many of these countries are located in or around Asia, a region that is heavily dependent on oil from the Middle East. Facing the pressures of oil supply constraints, inflation concerns, and currency volatility, these countries have likely dipped into their gold reserves for liquidity and currency protection.

Second, Gold is a zero-yielding asset. As Treasury yields rise, gold becomes less attractive from a risk/reward perspective. That dynamic hasn’t mattered much until recently, but I believe it’s another force making other assets more attractive at the moment.

Third, the broad risk-off sentiment has hit investors overall, putting downward pressure on assets that have generated outsized returns. Gold falls squarely in that camp. And even if a de-escalation leads to a risk-on environment, I believe other assets would perform better.

Bottom line, Gold has lost its luster.

You Get What You Pay For

The broader AI theme is still driving much of the earnings optimism, productivity gains, and investment in the U.S. economy. Guidance from the hyperscalers and most technology companies continues to show more and more AI capex on the horizon. Earnings expectations continue to rise. In my view, the war in Iran does not change this thesis at this point.

What has changed is the backdrop for mega-cap technology stocks. Prices have been hit pretty hard since the highs of last October, and the constant commentary about how frothy the stocks are has died down. Specifically, the Nasdaq 100’s forward price-to-earnings ratio (P/E) has compressed by 23% since the highs at the end of October, while the Russell 2000 P/E has only compressed by 9%.

There are certainly risks to technology capex if this war results in a global recession, but that is not our base case. Not to mention that the prevailing trend in tech land is to keep up with the competition by continuing to spend. I don’t see that changing in the next few quarters unless markets and economies around the globe experience a major breakdown.

Our outlook stance was that the show must go on in AI spending and innovation. That remains intact. The growing dislocation between earnings expectations and prices offers an opportunity for long-term investors who believe in the AI theme. Also, when markets become more worried about economic growth, investors tend to flock to reliable growth stocks. Bottom line, the valuation compression in tech offers an attractive opportunity.

The Ultimate Caveat

The war has changed things for many countries around the globe and has now lasted long enough to warrant a re-evaluation of portfolio risks. We’ve by no means included an exhaustive list of things that have been affected, and given the highly uncertain environment, more could change rapidly.

The best we can do is invest based on what we know at present, without reacting to every headline along the way. After one month of ongoing conflict and structural changes to energy infrastructure in the Middle East, I believe a re-evaluation of positioning for the near-to-medium term is warranted.

As always, we are watching things closely and will bring updates as things evolve. Happy spring.

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