Market Thoughts: Instant karma's gonna get you

As we wrap up earnings season, some of the knee-jerk selling thematically swirling AI-disruption seems to have calmed. We’re about to see the fifth consecutive quarter of S&P 500 double-digit earnings growth year-over-year. More importantly, margins look to be trending higher.

Fear of ‘instant karma’ disruption from agentic-LLMs looks better grounded. Disruption? Absolutely. Instant? Not so much. But that narrative will continue to circle. The lower repricing seen across hyperscalers reflects investors assessing the erosion of free cash flow, redirected into capital expenditure. Also, realization that stock buybacks may slow as cash flow pivots to investment.

The leadership rotation we’re seeing is healthy. The repricing of ‘to infinity and beyond’ perfectionism—to something less than perfect—is warranted. Retail investors remain disciplined buyers. Over the next twelve months I believe they’ll be rewarded. But it’s a random walk. It always is.

The pain trade argues for markets to press higher. Currently, no one believes they should. Seasonality suggests markets will be squishy. Inflows usually come in at the start of a year, pause, then reaccelerate into mid-year. Past performance is no guarantee of market direction. Expect turbulence.

While European equity markets continue to outperform the U.S., where we go from here warrants recalibration. Last year’s valuation catch-up to the U.S. was deserved. Also, a long time in the making. European multiples did the heavy lifting last year; earnings now need to play a walk-on role. In the U.S., they continue to play the leading role. Don’t let that get lost in the ‘sell the S&P 500’ narrative.

Europe effectively had no earnings growth last year. That’s an index-level observation. We continue to lean into sector and single-stock positions across Europe. We own broad market beta, paired with specific sector and single-stock exposure. They play in concert.

While we expect solid global growth ahead, we’re shifting to a mid-macro cycle. The bulk of central bank easing is behind us. Last year’s gift to investors? Double-digit returns in the U.S. were driven by earnings, not multiple expansion. We may see that happen again this year.

The math argues we’re playing for less upside in equity markets this year than last. The macro and market environment suggest speed bumps ahead. Fast approaching? I don’t believe so. But I’m smart enough to know what I can’t know.

We live in a fast-paced, policy-driven, geopolitically challenging world. A case in point, the headlines we’re reading about Iran readying for war that markets seem willing to push off. It’s interesting what investors sometimes look through.

I believe investor calm comes from exhaustion, not indifference. The market’s recovery, post Liberation Day, is the reference point. Keep an eye on spot oil and gold prices for sentiment shifts. Also, bond yields and the dollar.

Geopolitics and policy concern today seem a collective “Hail Mary.” At an index-level the S&P 500 continues to show little volatility. That “nothing to see here” shrug driven by low stock correlations. Under the surface, sector, single-stock and factor volatility are high.

At some point, something’s gotta give. For now, I expect we’ll continue to see cautious trading and modest deleveraging. Chips on the table, big bets being trimmed.

“Instant karma’s gonna get you...” John Lennon, Yoko Ono, the Plastic Ono Band.

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 02/19/26.

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.