Market Volatility: Questions Driving Today's Uncertainty

When markets become more volatile, investors naturally start to question what has changed and what hasn’t.

Fighting in the Middle East, the effective closure of the Strait of Hormuz and a sharp rise in energy prices have reintroduced uncertainty just as parts of the global economy were beginning to regain momentum. Is this a temporary disruption, or something more structural?

Meanwhile, markets were already undergoing a significant transition.

For several years, returns were heavily concentrated in a narrow group of stocks, particularly companies tied to AI. As higher energy prices and renewed inflation concerns complicate the outlook, investors have begun to look beyond those market leaders, testing whether recent signs of broader participation can endure.

Just how durable is this market rotation — and what does it mean for portfolios today?

In this article, I’ll explore these questions and share my perspective on navigating an evolving investment environment.

How Have Recent Events Changed the Market Narrative This Year?

Coming into 2026, there was a growing sense that the market was finally broadening. For several years, returns were heavily concentrated in AI‑related stocks, while much of the economy was sluggish.

Late in 2025, this began to shift. Economic activity showed signs of reacceleration, and areas like small-caps, mid-caps and value stocks started to participate.

Fighting in the Middle East has driven oil prices sharply higher, disrupting this optimism. Higher energy costs reignited inflation concerns and raised questions about the durability of a cyclical recovery. The result has understandably been a more cautious tone across markets.

Why Do Higher Oil Prices Matter So Much for Investors?

Higher energy costs ripple through the economy. A meaningful rise in oil prices can push inflation higher, making it harder for central banks to cut interest rates.

High energy prices also act as a tax on consumers and businesses. They push up fuel and transportation costs, leaving less room for discretionary spending and potentially delaying corporate investment. Housing is another pressure point, as rising mortgage rates can stall a long-awaited recovery.

None of this guarantees a downturn, but it does increase uncertainty.

Is the Recent Market Pullback a Sign of Deeper Stress?

So far, the sell-off has been relatively orderly. Volatility has picked up, but credit markets — where companies borrow money — haven’t shown signs of panic. This is an area where indications of more serious stress often appear first.

Sentiment, however, has turned very negative. On the positive side, when expectations are low, even modestly good news can drive sharp rebounds.

In environments like this, it’s less about calling the next move and more about staying disciplined.

What Explains the Rotation Away from the Biggest AI-Driven Stocks?

At its core, it comes down to the rate of change in profit growth among the large tech firms. AI was the dominant theme for several years, as earnings growth accelerated year in and year out. But capital spending tied to AI infrastructure is showing signs of peaking, and investors are asking tougher questions about returns on those massive investments.

Earnings growth remains strong for many large technology companies, but it’s slowing down. Markets have tended to reward acceleration more than absolute levels, which may open opportunities in other parts of the market where earnings might be poised to improve.

Why Are Value, Small‑Cap and Mid‑Cap Stocks Getting More Attention?

Several potential tailwinds have aligned. Policy changes — specifically related to the One Big Beautiful Bill Act, interest rate dynamics, deregulation and reshoring efforts — can help accelerate profit growth potential in small- and mid-sized companies.

Valuations also matter. Large-cap stocks entered the year at relatively high price levels, while smaller and more value-oriented areas were priced more modestly.

While valuations alone don’t drive markets, they help set expectations for longer-term returns, especially when earnings and cash flows are improving.

Is the Shift in Market Leadership Sustainable?

Periods of leadership by company size and style tend to last many years. Still, the cycle favoring large-cap growth lasted over 10 years, an unusually long period. From that perspective, it’s reasonable to think this shift away from large growth dominance has room to run.

We think value leadership can be sustained. Value tends to benefit more consistently from higher interest rates, dividends and exposure to real-economy assets like materials and energy. We also believe maintaining exposure to small-caps is important because smaller companies can deliver powerful bursts of outperformance.

Overall, we believe this is a good time to be boring. During volatile periods, companies in defensive sectors such as health care, consumer staples, utilities and financials — where demand for goods and services is typically less sensitive to economic conditions — can play an important role. This is particularly true when their valuations are more reasonable.

Is This the End of the ‘Magnificent Seven’?

If “end” of the Magnificent Seven means the end of those companies dominating market returns and narratives, then yes, I think that phase may be behind us.¹ In recent years, investors benefited from buying the Magnificent Seven as a bundle. Going forward, we think company-specific factors will drive performance.

How Has AI Uncertainty Affected Positioning?

When investors start questioning the long-term economics of a business, valuations can reset quickly.

That’s been especially true in parts of software and business services, where AI feels like a bigger threat. It’s difficult to disprove concerns about long-term disruption, so caution makes sense.

At the same time, established bellwethers with strong balance sheets and durable franchises can still play a role. The AI investment cycle hasn’t stopped. It’s just being scrutinized more carefully.

What Helps Keep You Optimistic About the Long Term?

Innovation. The cost of starting companies has come down dramatically, and we’ve seen a rapid rise in new business originations in the U.S. Technology empowers people to do more with fewer resources, and the pace of change is gathering speed.

Periods like this can feel uncomfortable in the moment, but they often lay the groundwork for future opportunities. From a long-term perspective, I think that’s a reason to stay engaged instead of retreating.