Note: This update was written prior to the U.S. strike on Iran. While the outcome of this event is uncertain, the structural shifts discussed below remain unchanged.
Market Recap:
The S&P 500 fell -0.87% in February while the equal weight S&P 500 gained 3.4%. Beneath the surface, leadership is clearly shifting. Technology and AI stocks are struggling while other sectors of the index are performing quite well. The tech heavy Nasdaq index fell -2.3% in February.
International and emerging markets continued to outperform the U.S., up 3.93% (EFA ETF) and 5.57% (EEM ETF) respectively in February.
What We’re Watching:
Over the past year, our momentum and trend driven strategies have steadily shifted exposure away from U.S. technology into industrials, materials, energy, and international / emerging markets. Our global market fund has also captured strong returns from commodities, metals, and currencies.
Evidence is accumulating that the global opportunity set is broadening out for the first time in nearly two decades. As leadership shifts and expands, the importance of active portfolio and risk management combined with meaningful diversification are returning.
Some may argue this is a temporary rotation trade. However, the weight of the evidence continues to point toward a larger structural shift. Going forward, we’ll continue to monitor the dynamics of this rotation. With so much concentration built up around U.S. tech, there will be volatility.
This environment highlights why we manage portfolios systematically. No emotions, no predictions, we take positions because the price tells us to, not because we think we should. The market front runs narratives. Prices move first, and in hindsight, investors create narratives that fit the trend and pretend like they knew what was happening the whole time.
When managing capital, we prefer to be on the price side, not the narrative side.
Chart(s) of the Month:
Technology capital expenditures have surged to historic highs, driven largely by AI, while investment in energy, mining, and commodity production remains near multi-decade lows. AI may be digital, but its infrastructure is physical, requiring power, metals, and industrial inputs. Years of underinvestment in supply, combined with rising demand, create the potential for structural constraints. This dynamic aligns with the ongoing rotation we are seeing as industrials, energy, materials, and emerging markets begin to outperform concentrated U.S. technology leadership.
This next chart is similar to the emerging market vs. U.S. equities chart shared last month as it compares the MSCI World ex U.S. relative to the S&P 500. After more than 15 years of steady U.S. outperformance, relative strength has begun to turn.
If this trend continues, it will mark a significant regime shift toward broader global participation. For investors heavily concentrated in U.S. large cap stocks, this has meaningful portfolio implications.
