There’s a theme circulating in markets right now known as the “AI Disruption Trade.” The idea is that rapidly advancing AI tools could permanently alter entire industries. For example, Intuit — maker of TurboTax and QuickBooks — has seen its stock fall roughly 40% in recent months as investors worry AI could threaten its core business model. A broader basket of software companies tied to this narrative is down about 20% this year. These moves make for dramatic headlines, so the story is receiving plenty of media attention. Yet beyond the AI disruption narrative, most other areas of the market are performing quite well so far this year.
What’s working in 2026?
While certain software and large technology stocks have struggled — holding the S&P 500 to a slightly negative return so far in 2026 — strength has emerged elsewhere. International markets are up solidly year-to-date, small-cap stocks are outperforming large caps, and several emerging markets are posting double-digit gains.
In fact, global equities as a whole are up roughly 3% this year. Traditional inflation hedges such as gold and real estate have risen 16% and 8%, respectively. Even bonds, often overlooked during equity rallies, are up more than 1% to start the year and are positioned to deliver positive annual returns. While these developments may not dominate financial news coverage, they serve as a reminder that opportunity exists across many segments of the market — even when popular technology stocks or major benchmarks struggle.
Could AI disruption fears spill over into diversified portfolios?
For now, diversification is doing what it’s designed to do. Market leadership is rotating rather than collapsing, and strength outside large U.S. technology stocks is offsetting weakness in that segment. To borrow a sports analogy, players who spent the last few seasons on the bench — small caps, real estate, and European equities — are stepping up, just as the recent year’s MVPs — large U.S. technology stocks and the S&P 500 — are cooling off.
That said, global markets rarely move in isolation. A modest 5% decline in the S&P 500 can often be absorbed as part of normal volatility, particularly if leadership continues to broaden. However, a deeper decline — 10% or more — could prompt broader concern. When widely held, systemically important companies such as Microsoft are down 20–25% from prior highs, investors may begin to question whether weakness is isolated or more fundamental.
It’s difficult to predict how sentiment might evolve in that scenario. That’s precisely why diversification remains critical. Bonds today offer starting yields near 4%, providing income and potential stability. Meanwhile, small-cap and non-U.S. markets trade at more attractive valuations, offering a margin of safety that wasn’t present in many mega-cap stocks last year.
Rotation can continue. Spillover is possible. A balanced portfolio is designed to navigate both.
Don’t want to miss anything?
Subscribe to our monthly newsletter for market insights.
