Transcripción
Amanda Agati:
Hola, amigos. Resulta difícil creer que ya es momento para la edición de marzo de Adding Alpha, pero aquí estamos. So, let’s take stock of where markets are two months into the new year and gauge what will likely come next!
We’re only about 60 days into the new year so a lot can change, but for now, a change in the calendar has translated into five very different themes for investors compared to the past few years.
Increased market breadth. Increased market breadth has been reflective of shifting market internals. While it was below-trend in 2025, breadth has been climbing back up into the mid-60’s% range YTD. The equally weighted version of the S&P 500 is also outpacing its market cap-weighted equivalent by 500 basis points so far this year.
Resilient fundamentals outside of just mega-cap artificial intelligence-related companies.
Q4 earnings results beat consensus expectations, and guidance for 2026 was revised higher.Earnings growth has been resilient, in particular, among Financials, Industrials and retail segments of Consumer Discretionary. Companies are still able to pass on rising prices as margin expansion continues. Strong earnings expectations for 2026 reduce the market's dependence on multiple expansion but increase the probability of a "grind higher" market environment. From a technical analysis perspective, both increased market breadth and solid fundamentals across sectors suggest market internals are positive, but momentum is waning in search of a new catalyst.
A notable difference so far this year relative to past years, is the shift in investor sentiment within the AI trade.
We are starting to see some material divergences in relative performance. It’s partially a function of capex budgets and key questions regarding when the returns on invested capital will begin to show up in earnest. It’s also partially a function of investor skittishness around which companies will be the disruptors and which ones will be disrupted. Many software companies have been in the crosshairs on this topic lately.
The recent Supreme Court ruling on tariffs suggests that the net-effect will be a lower global average tariff rate, but this isn’t the end of the story.
The Administration has several other avenues with which it can pursue tariffs and we don’t know yet which sectors, industries, etc. may be included/excluded going forward. While the tariff story is far from over, the market seems to have quickly moved on from the worst-case scenarios of spring 2025.
The fifth theme has been how little markets have seemed to react to geopolitical turmoil, even when there have been potential implications for energy markets.
This is a “surprise” only in how muted market reactions have been even when there have been headlines about situations in Nigeria, Venezuela, Iran, Russia/Ukraine, Greenland, etc.
Markets have treated these like headline noise and priced in almost no sustained equity risk premium. While events like these tend to create some volatility in the short run, markets appear largely unaffected in the longer run, with notable exceptions of the OPEC oil embargo in 1973 and Iraq’s invasion of Kuwait in 1990. That longer-run concern usually shows up in the form of heightened market volatility, but it really hasn’t to-date. The 20-year average for the VIX is 19.5 (we’re currently at about 18.4) and the MOVE Index has a 20-year average of 85 (we’re currently at about 65).
Now that we’ve taken stock of those 5 key differences that have characterized markets so far in 2026, let’s talk more about the path forward.
On the international front: International equities have been outperforming on a year-to-date basis, just like they did last year – but unlike last year, which was driven largely by U.S. dollar weakness and multiple expansion for those markets, this year’s story is more fundamentally-based, with stimulus coming out of Europe, accommodative fiscal policy in Japan and tech innovation coming out of EM/Asia. We think this story has legs.
Domestically, despite all the purple haze, purple rain, deep purple vibes from policy uncertainty, the market is surprisingly serene and has figured out how to refocus on what matters to it: AI, tariffs and the path of earnings growth. Net-net, with earnings growth expected to be more than 14% in 2026, we see a similar scenario playing out relative to 2025 where earnings are the primary driver of market returns – not valuation multiple expansion. With valuations at elevated, though not bubble territory, levels for the broad market, it is possible we could see the good kind of multiple contraction over the course of 2026, where a sustained earnings growth acceleration ultimately leads to a net-decline in valuations (the E outpaces the P in P/E), but it’s still a positive returning year for markets.
