Investors’ Outlook: Market pruning

Market pruning

Volatility has blown through the hedges this year. On one side, geopolitical volatility has taken deeper root, with markets on high alert as tensions between the US and Iran over a nuclear-program deal erupted in war and fanned fears of broader regional instability and potential energy-market disruptions. On the other, investors took to their shears to prune certain risk assets in February’s sell-off that reflected fears that AI disruption could cause a “SaaS-mageddon.”¹

We believe this highlights the importance of diversification, and is also why we have maintained our overweight in commodities.

Even as volatility rattles some branches, investor sentiment is generally bullish and the macroeconomic environment solid. We’re currently in what appears to be a Goldilocks economy in the US, where growth is accelerating, inflation is normalizing, and the labor market seems to be stabilizing. US manufacturing is also showing signs of life after nearly three years of stagnation, and while consumer sentiment is still subdued, that too may still follow.

The conditions for economic growth look supportive to us, with central banks across the G10² having been in easing mode, Japan aside, and the cumulative effect of those interest-rate cuts should continue to filter through the economy well into the year. Fiscal stimulus outside the US is also poised to provide a positive impulse for global growth, while China lowered its target for 2026 gross domestic product growth to a range of 4.5 percent to 5 percent.³

We believe some trimming can be a good thing. It shows markets are vigilant and not necessarily willing to overpay for hope. They want to see evidence in earnings and guidance, and that’s healthy, in our view, especially as it has paved the way for some diversification. The rotation has seen investors broadening out on a regional and sectoral level, specifically out of the US into European and emerging-market (EM) equities, as well as from technology into consumer staples and industrials.

On AI specifically, the pullback shared one common denominator, which was concern over business models that rely on human cognitive capital and limited competitiveness that make them vulnerable to AI displacement. We still need to learn what AI really means, and that learning can only happen as we go. Some volatility is likely to be a companion going forward.

In this Investors’ Outlook, you’ll find an explainer on the K-shaped economy and what it could mean for investments, a closer look at what’s happening in oil markets, and our views on equity markets.

We aim to help clients’ portfolios grow and bloom over time. A little market rebalancing can leave the overall ecosystem stronger for the seasons ahead.