“Now Exhale”
OUR CURRENT POSITION ON THE STOCK MARKET ENVIRONMENT
The nurse walks you into the exam room, takes a few measurements, and tells you the doctor will be in shortly.
Then comes the waiting.
If you're Level 3 phone-addicted, you instinctively pull out your phone to see what you missed. If you're Level 2, you resist the urge for a few moments before giving in—"I'll do better next time." And if you're Level 1, you somehow overcome the neural pathway battle that has you checking your phone 999 other times during the day—and discover something that feels both strange and refreshing: simply sitting quietly.
Eventually the doctor walks in, exchanges a few pleasantries, places the stethoscope on your back, and says, "Take some deep breaths."
A funny thing happens when you actually do.
The inhale takes longer than you expect. As your lungs approach full capacity, a growing tightness develops—as if there couldn't possibly be room for any more air. Yet somehow, there is. One more breath. One more second. A little more expansion.
Then comes the exhale.
Long. Steady. Relieving.
It reminds us that breathing was never meant to consist only of inhaling. You need both.
I open with this imagery because the stock market also goes through its own breathing exercises.
For the past five years, we've been on a long inhale. Investors have poured money into a relatively small group of U.S. technology companies culminating in incredible price and overall market growth. Artificial intelligence has only accelerated the trend, driving extraordinary gains in companies like Nvidia, Meta, and, more recently, Micron, Palantir, and Broadcom. Like a deep inhale, each quarter seems to stretch valuations a little further. Every time it appeared there was no room left, the market somehow found a little more.
And here's where we are today.
If investors keep trying to squeeze just a little more out of AI-related stocks, eventually the market reaches a point where expectations become difficult to exceed. And just like taking the deepest breath possible, the exhale thereafter isn't usually well controlled. That could happen here. The rotation away from these highly concentrated areas could be gradual, or it could be abrupt.
Does that mean we should abandon technology stocks altogether in anticipation of such a move? I don't believe so. That approach can create its own problems. As I've said before, even if you make the right decision at the wrong time, you're still wrong. Performance numbers don't lie.
Instead, over the past year we've gradually repositioned our portfolios. We've reduced our Nasdaq 100 exposure—the area that benefited most from the market's concentration—by roughly one-third. At the same time, we've increased exposure to international markets and smaller U.S. companies, areas that have participated far less in the AI-driven rally and may offer attractive opportunities if market leadership continues to broaden.
None of these changes were made because we believe artificial intelligence is a passing fad. Quite the opposite. AI will likely shape our economy for years to come. But even the strongest trends experience periods when enthusiasm runs ahead of fundamentals and leadership expands to include other parts of the market.
There are already signs that this broadening may be underway. The Russell 2000 has outperformed both the Nasdaq 100 and the S&P 500 over the past year for the first time since the period from November 2020 to November 20211. International markets have also experienced stretches of outperformance since 2025 before being particularly hampered by the Iran war this spring.2
Whether this broadening continues or technology resumes its market leadership is one of the biggest questions facing investors today. As investors, one thing we don't want to do is pick sides.
What we do know is that healthy markets, much like healthy breathing, aren't meant to move in only one direction. Exhales are good and necessary.
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