Last quarter’s Investment Review and Outlook struck a decidedly cautious tone for 2026 – and boy was that note of caution timely! The stock market rang in the new year with equity investor enthusiasm showing signs of waning. To top that off, in late February, US and Israeli forces joined together in attacking Iran and taking out major players in their leadership circles. These military actions have clearly unsettled the global geopolitical world order as well as the financial markets. But there is more. Under the surface there are emerging signs that we may be entering a new phase of the 2023-2025 bull market cycle. It appears that the “Magnificent Seven” technology stocks on balance have gradually ceded market leadership to previously lagging sectors. The technology-laden Nasdaq 100 index moved into correction territory during the quarter, with stalwart Microsoft now down over 30% from all-time highs as of April 13. Meanwhile, many lagging sectors such as energy are performing rather well. While oil stocks have benefited handsomely from the recent sharp rise in oil prices, they entered the year trading at valuation multiples below broader market averages and continue to do so.
The geopolitical outlook appears rather parlous with no clear signs of an end to the hostilities. Moreover, we expect secondary shocks in the financial markets as a result of the growing uncertain macroeconomic backdrop. For example, we feel that corporate earnings estimates, which have remained firm since the beginning of the year, could be guided downward by corporate executives in coming weeks as the full effects of the war may be more pronounced in the second quarter and beyond. Should earnings disappointments emerge, playing defense may be the best path forward. At the same time, we are organizing a shopping list of undervalued stocks as increased volatility tends to create new opportunities. It may be a bumpy ride ahead, but we are optimistic that our positioning supports clients’ progress toward achieving their longer-term investment goals.
Dawn of a New Era of Value Investing
While major stock market indices declined during the quarter, value-oriented and equal-weighted indices significantly outperformed. While we recognize that a disciplined investment approach may result in market-lagging performance in certain years, this reflects intentional risk management and a commitment to proper diversification. For example, while the S&P 500 index is weighted heavily in large technology stocks, our approach is driven by striving to achieve greater diversification and a strict focus on valuation metrics. In other words, we invest in what we believe are “attractively priced” stocks, having significant upside potential, while emphasizing valuation discipline as a means of seeking to manage downside exposure. This has resulted in our relatively higher exposure to energy and mining stocks vis-à-vis the S&P 500, which historically provides better diversification in an environment of rising energy prices and sticky inflation.
The large capitalization technology stocks have had quite a run in the past three years. With the recent strong growth trajectory of revenue in this sector, it is no surprise. But we believe that the combination of elevated stock valuations in the tech sector coupled with signs of decelerating revenue growth may continue to drive rotation into other sectors of the market. We do see an increasing number of technology stocks that could be approaching prices that we believe are worthy of our attention. But we are finding many more solid opportunities outside the technology sector that we believe have strong upside potential and that may provide more ballast to mitigate financial market dislocations during these uncertain times.
This article is provided for informational and educational purposes only. The information contained herein is not intended and should not be construed as individualized advice or recommendation of any kind. Where specific advice is necessary individuals should contact their professional regarding their circumstances and needs. Any opinions and forward-looking statements expressed herein are subject to change without notice. The information provided herein is believed to be reliable, but we do not guarantee accuracy, timeliness, or completeness. It is provided “as is” without any express or implied warranties. There is no assurance that any investment, plan, or strategy will be successful. Investing involves risk, including the possible loss of principal. Nothing herein should be interpreted as an indication of future performance. Past performance is no indication of future results. Investment Advisory Services are offered through Mariner Independent Advisor Network (MIAN), an SEC Registered Investment Adviser. Caplan Capital and MIAN are not affiliated entities.