Investment Insight

The current market environment is marked by excessive risk-taking, extreme volatility, and unusually narrow leadership. While the broad indices may appear more stable on the surface, individual stocks beneath the index have been moving dramatically.

According to Bloomberg data compiled by Citadel Securities, over a 30-day period beginning in February 2026, the average stock in the S&P 500 moved 11.4% in absolute terms, placing that level of volatility in the 97th percentile over the past three decades. Earlier this month, that figure reached 13.8%, a 99th percentile event and a 3.5 standard deviation outlier.

In this type of environment, short-term stock prices are often driven by momentum, capital flows, and narrative rather than company-level fundamentals. That is very much the case today. The market is rewarding a narrow set of perceived beneficiaries while overlooking many businesses with durable earnings power, improving fundamentals, and reasonable valuations. Periods like this can be uncomfortable, because prices often move for reasons that have little to do with the underlying business. Momentum, capital flows, and investor psychology can dominate fundamental analysis for extended stretches of time.

This has happened a handful of times over the past 30 years. In each case, discipline, patience, and fundamental grounding were essential. Now is no different. Over time, the market ultimately demands improving fundamentals, durable earnings power, and rational valuations.

That distinction — between what the market is rewarding right now and what it will eventually demand — is easy to lose sight of when an entire sector is being flooded with capital. Money pouring into a theme, and prices rising in response, feels like confirmation. It is often mistaken for evidence that the underlying businesses are succeeding, when in fact it can simply mean that a large number of investors have decided to make the same bet at the same time. Price and value can move together for a while, but they are not the same thing, and mistaking one for the other is precisely how the current environment has produced its central paradox.

The AI Infrastructure Paradox

Nowhere is that confusion more visible right now than in AI infrastructure. At present, the market is rewarding risk-taking to an extreme degree, particularly within the artificial intelligence investment theme. Investors have aggressively favored the perceived direct beneficiaries of AI infrastructure — semiconductors, networking equipment, power equipment, and hyperscale cloud platforms — often at the expense of nearly every other investment category. The size of the capital flow has itself become the argument: money is going there, so the thesis must be sound.

Some of these companies are high-quality businesses, though their characteristics are beginning to change as they wager heavily on a purely AI future. The issue is not quality. The issue is valuation and expectation. Current prices increasingly depend on the assumption that AI infrastructure spending can continue growing at an extraordinary rate for many years.

That may prove true for a small number of companies. But as a broad investment premise, we view it as a demanding and low-probability assumption. It requires continuous AI model improvement, sustained end-customer demand, massive capital availability, adequate power and data center capacity, and attractive returns on enormous capital expenditures.

We are not comfortable underwriting those assumptions across a portfolio. Instead, we favor investments with a lower bar to clear and a more visible path to value creation.

Software as the Distribution Layer

We believe the highest-probability path for AI adoption runs through existing software companies — a view that cuts against the current narrative that AI will broadly harm software businesses. In our view, certain software companies already own the customer relationships, workflows, data context, and security permissions where AI must actually be deployed.

Software companies are not bystanders as enterprises adopt AI. They are, in many cases, the distribution layer.

A company does not simply need "AI." It needs solutions. AI becomes useful, trusted, and monetizable when it is embedded into the systems where employees already work, where data already resides, and where decisions are already made. We see this playing out across the market as established software providers introduce new modules and services that create additional value for their customers.

Practical AI, and the Case for Conservatism

Two examples help illustrate how this plays out in practice — one in enterprise software, one in the value of a stabilizing balance sheet.

Enterprise software: applying AI to real workflows. Rather than positioning as an AI infrastructure play, some enterprise software vendors are applying AI in a more practical, economically grounded way — helping large organizations improve productivity, automate complex workflows, and get more value out of existing mission-critical systems without expensive upgrades or disruptive migrations. That distinction matters. The market is currently rewarding companies selling the picks and shovels of AI, often with limited visibility into the ultimate return on that spending. We believe the more durable value creation will come from businesses that convert AI into measurable customer ROI, and we are seeing early evidence of that in the form of accelerating bookings and contracted revenue growth at select companies pursuing this approach.

Balance sheet strength: conservatism as a stabilizing force. The current market environment has also punished holdings seen as outside the AI narrative altogether — durable, diversified businesses with fortress balance sheets, significant cash positions, and disciplined capital allocation. We view this kind of business as a stabilizing force within a portfolio, similar in some respects to the role fixed income has traditionally played. Recently, this type of conservatism has been out of favor, as investors have aggressively chased higher-momentum areas of the market. That is not, in our view, a reason to abandon discipline. A temporarily unfashionable narrative is not the same thing as deteriorating fundamentals.

Looking Forward

The current market is creating a clear divide between price momentum and business value. Investors are increasingly paying premium prices for companies tied to the dominant AI infrastructure narrative, while many durable businesses with strong fundamentals, recurring revenue, practical AI opportunities, and reasonable valuations remain comparatively overlooked.

We believe the most durable long-term returns are often found where expectations are reasonable, fundamentals are improving, and value creation does not require a perfect future. That means favoring companies that can compound value through recurring revenue, strong customer relationships, practical technology adoption, disciplined capital allocation, and identifiable paths to earnings growth.

This kind of discipline matters most when markets become narrow and narrative-driven. Investors often crowd into the same perceived winners and abandon businesses that don't fit the current theme. That creates risk in the popular corners of the market — but it also creates opportunity for investors willing to look past the immediate narrative and toward the fundamentals underneath it.

This material is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Any companies referenced are discussed for illustrative purposes only and may or may not be held in client portfolios at any given time; holdings are subject to change without notice. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. Please consult with a financial professional before making any investment decisions.