What is happening this first month of the year and how should we navigate the market situation that is 2026? If you have read my last few CIO reports they mostly read, caution, reduce risk exposure, prepare for a correction and tech and communication companies may be ripe for some repricing or a correction. We are seeing that now with software names hitting 2- and 3-year lows, the Mag 7 index is down for the year so far, and AI names are hanging on to gains but not by much.
As the Olympic opening ceremonies kicked off and the Super Bowl was played over the weekend, the stock market is having an interesting run to open 2026.
- The Dow is up 4.4%
- S&P 500 is up 1.6%
- Nasdaq is down .3%. For investors concentrated in software names it feels much worse.
- The iShares software index symbol IGV is down 21.9%, Applovin is down 39.64%, Salesforce down 27.76% and Microsoft is down 17%.
To explain the fear driving down software stocks in the last few weeks and months I wanted to quote WSJ writer Sam Goldfarb:
“Pressured by growing worries about the disruptive potential of new AI coding tools, shares of large software companies such as Salesforce and ServiceNow have been sliding for months. But now the prices of software-company bonds and loans are also dropping. Right now, the threat posed by AI is vague. But investors have been alarmed by the rapid progress of Anthropic and others in developing tools that make it much easier to write software and streamline complex tasks for professionals. Though such advances could potentially help some software companies increase profit margins, investors still worry they could also put some out of business, as clients develop software themselves or use the plug-ins.”
Change is in the air is a good way to think about 2026… that and it is a year to concentrate on keeping what you have not attempting to grow too much in what looks to be volatile markets. Think accommodative monetary and fiscal policy, rate cuts, $60 billion in tax refunds, higher SALT deduction cap etc. This could keep the rally going early in the year, but the second half does not look a promising.
Consider exposure to growth assets in countries where policy stimulus will be credible and impactful. International markets outperformed last year and outperforming so far this year with S&P 500 up 1.6% and the MSCI EAFE index up 5.88%. Some of this is being fueled by the weaker dollar. With European equities I like banks and industrials. There are not as many tech companies in the European index funds, so we utilize those quite a bit. Japan could benefit from shareholder friendly policies and economic momentum. Supply chain advancements in some emerging markets like South Korea and Taiwan.
I would say along with international companies, I really like Mid-cap companies for 2026. Especially mid-cap value names. They have strong fundamentals and many occupy a leadership position in a niche market. Historically trade at a premium to large cap companies but currently trading at lower valuations and could be an entry point.
AI companies continue to be in the headlines and may have a sharp correction coming, especially with a lot of the spending now using debt thus weakening their traditionally strong balance sheets. The other side of that is Enterprise AI adoption across other industries is a major shift. Staffing, workflows, innovation, productivity is changing so many businesses at an incredible pace. Focus on sectors where AI adoption improves margins through pricing power. Such industries like healthcare, finance, manufacturing, and logistics.
I would also say Industrials and Banks/Financials is the other area I think can be a place to hide in 2026. M&T bank up 18.13% this year, Citizens Financial up 16.62%. Caterpillar and Honeywell both up over 22% to start 2026.
On fixed income I would consider looking outside the US to take advantage of the weak outlook for the US Dollar.
On alternative investments, it looks like private credit may have had its run for the first time since this boom investors are trying to get out and decreasing total returns are driving this exodus. Hedge funds seem to be back with 2025 starting to perform again with pension plans and endowments adding the most in any year since 2007. The reason I mention this is these investments can be a good addition to the portfolio for sophisticated investors, but the fact that “The Labor Department is likely to ease the way for retirement plans to include more private equity, venture capital, hedge funds, private real estate or other alternative investments.” (WSJ) is concerning. As one CEO put it in the same WSJ article “The vast majority of people who own 401(k)s shouldn’t be investing in illiquid, expensive, hard-to-value assets.” I tend to agree.
So, with all that I summarize and continue my themes from last year: Reduce tech and bloated valuation companies in the most tax efficient way possible. Reduce Growth, add to value, international, midcap. With money market funds going from over 5% to around 3.5 and expecting to drop further, dividends are important. CDs and Treasuries for yield. They may only be 4% but will look great if next year they are 25% lower at 3%.
I hope that your 2026 if off to a prosperous start and please reach to the team at Campus anytime.
Bill
