Q1 2026 CIO Letter – Two Questions for 2026: AI Exuberance and Geopolitical Uncertainty

1. Are we in an AI bubble?
2. Will rising geopolitical uncertainty impact the market this year?

The allure of artificial intelligence (AI) was the primary fuel for U.S. market gains in 2025, but as we enter 2026, the jury is still out on whether we are witnessing a classic bubble. We have certainly seen the boom phase, characterized by massive investment in infrastructure and adoption; however, the debate over if there is irrational exuberance is where things become nuanced.

There is evidence of discipline: as capital expenditures for AI, estimated at over $1 trillion, have been largely funded by existing cash flows rather than debt. However, the ability to drive future revenue that will garner an attractive rate of return on those investments is less certain. Additionally, pockets of exuberance appear to exist, such as AI startups raising billions in capital at multi-billion dollar valuations without having a product or revenue.

For most investors, exposure to the AI theme is likely already a significant portion of their portfolio. Over 30% of the S&P 500 market capitalization is now tied to AI-related companies, a concentration level that is near the technology sector’s peak in 2000. In 2025, we began to see some dispersion in technology stock performance; while the “Magnificent Seven” stocks accounted for 43% of the S&P 500’s return, only Alphabet and Nvidia were truly magnificent performers, while others like Microsoft and Apple actually underperformed the broader index.^[2]

• Diversify within equities, not just across them. When leadership is narrow, broadening exposure matters—across sectors, styles, and market caps (not only the biggest names).
• Treat AI like a powerful theme—not a portfolio. Participation is important, but sizing the exposure to mitigate risk is key so that a single narrative doesn’t dominate portfolio outcomes.
• Stay valuation-aware. Elevated expectations increase the penalty for disappointment, even when the long-term story is real.

The start of 2026 has already brought a dramatic geopolitical episode with the U.S. capture of Venezuelan President Nicolás Maduro in January. The market reaction to this specific event was muted, with oil prices remaining steady around $60 a barrel, though recent unrest in Iran and potential U.S. action has triggered additional volatility in oil prices. Venezuela holds the world’s largest proven oil reserves, but years of mismanagement and sanctions have left its production at less than 1% of global supply^[3]. Even with the appointment of acting President Delcy Rodriguez and potential U.S. pressure for reform, restoring the country’s oil industry is a multi-year process requiring upwards of $100 billion in investment^[4].

The broader concern is if this U.S. action will embolden similar actions from other countries around the world further increasing global instability. Predicting how geopolitical events will play out is well beyond the scope of this letter, but from a market impact standpoint there are two principles worth noting:

• Maintaining international stock exposure can offer a buffer against U.S. centric risks. In 2025, international stocks saw their strongest outperformance versus U.S. stocks since 2017, fueled by a tumbling U.S. dollar. International Developed stocks returned 31.9% and Emerging Markets returned 34.4% in 2025, significantly outperforming the S&P 500’s 17.9% gain^[5].
• Discipline in the face of geopolitical events has historically paid off. “This time” always feels a bit different, but remember global stocks have gone on to reach new market highs through numerous geopolitical events in the past.

In markets, there is always something to worry about. The key is not to eliminate uncertainty (we can’t), but to avoid letting it hijack decision-making.

Geopolitical shocks and innovation booms create the same psychological trap: they compress time. Everything feels urgent. The most costly mistakes often come from treating a long-term plan like a shortterm problem.

As we ring in 2026, our portfolio guidance is steady and intentionally unexciting:

• Reinforce international diversification. 2025 was a clear reminder that leadership rotates, and the “rest of world” can outperform meaningfully.
• Broaden equity exposure across segments. Given uncertainty around AI outcomes, we want participation across sectors, styles, and market caps—not dependence on a narrow group of winners.
• Stay disciplined on sizing. If the future is asymmetric, risk management matters more than being exactly right.

We don’t need to forecast which headline will matter most this year to make good decisions today. We just need portfolios that can hold up—whether AI enthusiasm broadens, narrows, or rewinds, and whether geopolitics stay noisy or turn disruptive.