Risk Assets: Navigating the Crosscurrents

Under a resilient macro surface, risk markets are being shaped by powerful crosscurrents, driving rapid rotation across factors, sectors and regions.

While dynamic, the overriding macro backdrop continues to feel constructive, and in aggregate, global equity markets have posted strong gains so far in 2026.

Economic growth is holding up, the labor market and inflation seem to be stable—as indicated by last week’s employment and inflation prints—and the overall cycle is not behaving like an economy on the cusp of contraction. In that sense, the macro surface appears relatively calm, and risk markets seem to reflect this.

But under the surface, powerful crosscurrents—different parts of markets sending different signals at the same time—are flowing, forcing rapid equity leadership change across factors, sectors and regions. A select but expanding group of industries are seeing narratives around their future viability torn down in days, as markets try to compress the pricing of multiyear structural shifts into mere weeks.

Day to day, action is increasingly being driven by how quickly the market is repricing themes—AI disruption, “duration” versus “cash now,” U.S. concentration risk, and the global hunt for cheaper starting valuations—often with limited time for tangible earnings to validate the theory.

Such a backdrop highlights the vulnerability of binary calls or crowded, single-theme positioning. When the surface looks calm, but leadership is churning underneath, almost like a duck on the pond, portfolio construction and proper sector diversification matters as much as market direction.

Rotation, Not Risk-Off

Crosscurrents often show up as rotation rather than outright risk-off moves. That has been the defining feel of early 2026: not a uniform de-risking, but a constant churn in what investors believe will lead next.

Since the start of the year, this search has boosted many previously out-of-favor sectors—energy, materials, consumer staples, industrials and small-caps chief among them—at the expense of AI-related technology stocks and software especially, a theme we analyzed here recently.

Year to date, eight of the S&P 500 index’s 11 sectors are up; only information technology, financials and consumer discretionary are down. The Russell 2000 Index has outperformed the Nasdaq 100 Index by more than 10% over the past three months. U.S. value has also outpaced U.S. growth, while U.S. equities have trailed non-U.S. markets.

What stands out is not just the direction of rotation, but the speed. In software, sentiment has swung from confidence in asset-light compounding to anxiety about disruption risk in a matter of days. More broadly, markets are attempting to price creative destruction faster than companies can report results, adjust strategy or demonstrate outcomes.

As we outlined in our Solving for 2026 analysis, disruption tends to produce bifurcation: winners that embed AI, protect distribution and monetize outcomes, and laggards that face pricing pressure, churn or disintermediation. This is why the value-versus-growth debate has sharpened. Rapid rotation exposes valuation sensitivity and narrative fragility, arguing for style exposures sized for larger leadership swings and higher dispersion.

Earnings Matter Amid Structural Shifts

In an environment like this, a reliable compass is often bottom-up evidence. Earnings results and guidance can shed clearer light on demand, pricing power, costs and margins, offering a more durable read on economic health than any single macro release. Macro still sets the discount rate, but earnings determine whether the growth story is being earned or merely assumed.

This matters because we are living through a mismatch in time horizons. Investors are trying to price structural change—AI-driven productivity, labor substitution, reconfigured value chains and capital intensity—on a tactical schedule. But the proof only comes slowly: in customer behavior, renewal rates, unit economics, margin trajectories and the persistence (or not) of pricing power.

So far, the earnings picture has been supportive enough to keep the surface calm. Fourth-quarter results have been strong, with the median earnings growth rate for the S&P 500 companies that have reported at almost 10%. The economy is also forecast to grow at a 3.7% annualized rate in the final quarter.  

Corporate fundamentals therefore still provide enough support to justify participation in risk, even as the market reprices leadership aggressively.

A Balanced and Broad Risk Overweight

Against this backdrop, our posture remains aligned with growth. We remain overweight risk assets, but we are increasingly expressing that view through broadening rather than concentration, and through exposures where valuations and leadership dynamics look more favorable.

Internationally, the broadening out is very much in play. Our Asset Allocation Committee has advocated for an overweight emerging markets and selective developed non-U.S. regions such as Japan. We are overweight precious metals and positioned for a weaker dollar—both as diversifiers in a world of uneven volatility and as expressions of a regime where policy paths and credibility perceptions can move markets quickly.

In U.S. equities, we remain at target. The reason is straightforward: valuations remain high, and the dialogue around AI capex, monetization and disruption is intensifying. That doesn’t mean U.S. equities can’t work; it means the hurdle rate for broad-based multiple expansion is higher, and dispersion risk is rising. In that setting, a neutral U.S. equity stance can coexist with an overweight to global risk—particularly if breadth continues to improve outside the narrowest pockets of U.S. growth.

The investment implication is to stay invested, but to do so with a portfolio built for churn: diversified exposures across regions and styles, explicit risk budgets and an earnings-led process that distinguishes durable shifts from fast-moving narratives.