Amid some short-term volatility, investors currently seem quite sanguine about the state of the global economy and, by extension, the resilience of stock markets. This shouldn’t be a surprise as the playbook of the past few years has been simple: ignore the noise and stay on the bandwagon.
Nevertheless, some cracks in the big tech momentum trade have started to appear and it’s easy to overlook the fact that there were many other ways to make money last year than owning seven massive US stocks. This broadening in participation is encouraging, supporting the idea of an orderly rotation away from the dominant winners of recent years rather than rupture.
This year the key questions being asked are elemental: are we in a bubble, and what happens next if AI disappoints? On the bubble question, the consensus tone is “probably not and certainly not in the broad, system-wide way that typically matters”. On the “what next?” question, we would similarly offer the anti-climactic response that it also doesn’t matter, because the opportunity set is now sufficiently wide that there is “something for everyone”.
This should not be regarded as complacency. It is instead a reframing of how risk may be expressed in the year ahead – less as a single market crash narrative, more as a contest between regimes, leadership rotations, and the ability of portfolios to absorb shocks without forfeiting upside.
The key lesson from any bubble though is that valuation always matters in the long run. Fortunately, there are plenty of attractive places to hide today that don’t require jumping off the bandwagon and running for the hills. Our main message is that it will be critical to build in portfolio resilience through diversification during the year ahead.
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