When stock market investors chase themes, fundamentals take a back seat

I must admit that this is one of the most challenging markets I have experienced in my professional career. Investing has always involved uncertainty, but today’s environment feels different because it is being driven less by company specific fundamentals and more by broad macroeconomic themes that can dominate market performance for months at a time before abruptly losing momentum and giving way to the next trend.

Over the past few years, I’ve watched leadership rotate from one theme to another with remarkable speed. First came the rush into mega cap technology stocks, followed by the surge in bitcoin and other digital assets. Gold then captured investors’ attention as concerns about government deficits and currency debasement grew. Oil became the focus as geopolitical tensions intensified and energy markets tightened. Now we are witnessing an enormous wave of capital flowing into semiconductors and artificial intelligence-related investments.

The challenge is that these large thematic rotations often have little regard for valuation, timing or even near-term fundamentals. Capital simply chases where momentum is strongest. This is not good news if your company does not fit the latest trend. More recently, we have seen well known businesses such as International Business Machines Corp. experience double digit share price declines in a matter of days, while defensive stalwarts such as McDonald’s Corp. have found themselves testing new lows.

The message from the market is clear: Investors are rewarded if they get the timing right on their exposure to dominant themes while showing little patience for anything perceived as outside the current narrative.

Meanwhile, global bond markets continue to wrestle with the relentless growth in sovereign debt and a strengthening U.S. dollar. Governments around the world remain committed to large fiscal deficits, requiring ongoing debt issuance at a scale rarely seen outside of wartime or major economic crises. Yet the traditional buyer base is changing, with hedge funds becoming significant participants through leveraged basis trades, creating demand that can sometimes appear stronger than it truly is.

At the same time, the U.S. Federal Reserve appears increasingly focused on fostering conditions for higher real interest rates and maintaining confidence in the U.S. dollar. As a result, recent declines in the Consumer Price Index and the Producer Price Index have done little to shift the broader policy narrative or alter market expectations. A country carrying nearly US$40 trillion of debt ultimately needs buyers as much as it needs low inflation but it is walking a very fine line with higher debt servicing costs from persistently high rates.

This environment can be particularly difficult for self-directed investors because the cost of being too bearish has been exceptionally high. Staying on the sidelines over the past year has meant missing powerful rallies across multiple asset classes. For example, we had one of the best years for our clients but it was a difficult thing to do given the pervasive level of bearishness in the spring of 2025. That said, we mustn’t be overly bullish or we risk exposing portfolios to sharp drawdowns when leadership inevitably changes.