Market Volatility

AI-driven markets and what advisors should watch in 2026 Key market trends advisors should keep an eye on in 2026, including AI-driven valuations, monetary policy shifts, and macro risks affecting stocks and bonds. U.S. markets closed out 2025 with strong headline returns, driven largely by continued enthusiasm around artificial intelligence and a small group of mega-cap technology companies. At the same time, familiar late-cycle questions resurfaced: Are valuations running ahead of fundamentals? And how much patience will markets have for profits that remain more theoretical than realized? Below, we look at what impacted performance in the fourth quarter of 2025 and what financial advisors should be watching in 2026. We cover elevated AI valuations, evolving monetary policy expectations, and the key macro risks that could reshape the outlook for both equities and bonds. AI-driven returns dominated markets in Q4 Stocks rallied in 2025, driven largely by Big Tech companies racing to develop transformative AI. However, that enthusiasm increasingly reflects expectations about future profitability rather than earnings today. And all of those businesses’ investments in AI infrastructure have turned up the volume on talks of an emerging AI bubble. Valuations highlight growing reliance on future AI profits One of the clearest signals of elevated market expectations is the price-to-earnings (P/E) ratio, which compares current prices to current profits. How much are people paying to own the market, in other words, relative to its current profits? If this ratio gets high enough, investors start to ask themselves whether such a steep cost is worth it for a piece of those earnings. Sometimes investors seek out better relative value—one reason international stocks outperformed in 2025—and sometimes they continue paying a premium for growth. But that dynamic becomes increasingly pinned on hopes of hypothetically larger profits down the road, not the earnings generated today. So just how big are those AI hopes right now, and how relatively expensive is it for a share of the U.S. stock market’s earnings? We’re not at dot-com bubble levels, but we’re getting close. AI investment spending is reshaping market leadership Companies are committing enormous capital to expand their computing capacity, betting that scale and infrastructure will be critical to realizing AI’s long-term potential. As those investments have played out, the market has begun to highlight certain players, rewarding firms seen as better positioned to translate spending into durable earnings while penalizing those facing execution challenges. In the fourth quarter, shares of Google rose by nearly 30%, while Oracle and Meta declined by roughly 30% and 10%, respectively. While AI dynamics explain much of recent equity performance, monetary policy remains a critical backdrop for markets in 2026. Easing monetary policy could support markets in 2026 As labor market conditions and inflation have slowed, gradually easing interest rates may help cushion the market. The Federal Reserve cut its policy rate by 0.25% in December, and may do so again in 2026. The chart below illustrates the expected path of the federal funds rate based on both the median projection of members of the Federal Open Market Committee and rates implied by the pricing of market futures contracts. Beyond rate policy, the Fed has also taken steps to support market liquidity. In December, the Fed announced that it will purchase short-term securities to ensure bank reserves are ample, supporting the smooth functioning of the financial system. Kevin Hassett, Director of the National Economic Council, appears likely to be tapped soon as Chair Jerome Powell’s replacement. Hassett would likely lean into a monetary policy accommodative to the economy and markets. Why the macro backdrop remains constructive—but fragile An outlook of continued economic growth, incrementally more accommodative financial conditions, and resilient corporate earnings offer a favorable backdrop for stocks in the first half of 2026. While valuations appear stretched in certain parts of the market, the last quarter has seen overall price action cool off, potentially setting the stage for further gains. The impact of tariffs will likely continue to fade as we approach the one-year anniversary of “Liberation Day.” The Trump administration will take a more cautious approach to instigating surprises in the trade war in 2026, fearful of worsening affordability and market volatility in a midterm election year. Geopolitical developments involving President Maduro of Venezuela have already injected geopolitical uncertainty this year, yet we would expect the market impact to be muted overall, with effects, if any, showing up in oil prices. Key risks that could disrupt the market in 2026 Despite a constructive baseline outlook, several downside risks warrant close attention. The main risk for markets lies in currently weak but stable job growth deteriorating significantly. A sharp rise in the unemployment rate would bring with it a downturn in consumer spending and a vicious cycle of more anemic demand leading to further job cuts. A second, related risk involves financial conditions tightening rather than easing. A higher cost of borrowing and increased rates on safer securities could undermine the prices of riskier financial assets.

Middle East conflict is moving markets: What investors should know Nearly a year after sweeping tariffs sent global stocks into a tailspin, financial markets are again navigating a period of heightened uncertainty. Escalating geopolitical tension, including the conflict in Iran and concerns over protracted oil supply disruptions at the Strait of Hormuz, have pushed energy costs higher for businesses and households. As shown in the chart below, oil prices rose to $120 per barrel on March 9—which is double the level at the beginning of the year—before pulling back following President Trump’s comments that the war would be resolved “very soon” and that he would waive “certain oil-related sanctions to reduce prices.” Despite the pullback, the timeline for resolution remains unclear, and uncertainty around the conflict is likely to keep commodity markets volatile in the near term. The hostilities primarily impact U.S. companies and consumers through inflation. Rising oil costs push gasoline prices higher at the pump, reducing household spending on other goods and services. Firming inflation also complicates the Federal Reserve’s path forward, potentially delaying or reducing rate cuts. This, in turn, could push longer-term rates higher, raising borrowing costs for businesses and weighing on their stock valuations. Yet we’ve also seen a stronger market reaction outside the U.S. The chart below illustrates the heavier selling in stock markets such as Japan and South Korea relative to the S&P 500 since the conflict began—though both indices had jumped ahead of the American market earlier in the year. The steeper declines in Japanese and Korean equities can be attributed to: Japan and Korea’s oil import dependency on the Middle East. Both countries source the vast majority of their imports from the region, while the U.S. stands as a net exporter of oil. Their markets have a heavy weighting to energy-intensive industries such as semiconductor manufacturing and hardware production. Demand for a currency safe haven has strengthened the dollar, amplifying losses for dollar-based investors in international exposures denominated in local Asian currencies, including the yen. A knee-jerk reversal in what had become an overcrowded trade in Asian tech stocks, buoyed by AI demand. As an example of investor exposure to these markets, the Betterment Core portfolio primarily allocates to Japanese and Korean stocks via the Vanguard FTSE Developed Markets ETF (Ticker: VEA), which is 20% Japanese stocks and 7% Korean. A 90% stock 10% bond Core portfolio holds a 25.5% target weight to VEA, indicating the overall portfolio’s exposure to Japanese and Korean equities approximates 5% and 2%, respectively. How investors might think about managing their portfolios during market volatility Diversify across not just geographies but asset classes. Even as rates have recently ticked up, bonds have provided ballast to portfolios as stocks gyrate. Treasury Inflation Protected Securities have performed particularly well relative to other common portfolio allocations in the midst of this inflation scare. Where possible, make use of automated tax-loss harvesting. Dramatic swings in asset prices intraday like we saw on March 9th provide an opportunity to tax loss harvest before the market snaps back.

How AI is disrupting software stocks in 2026 AI coding tools are driving a wedge between broad tech and software-only funds. Here's what the divergence means for client portfolios. Software has a problem. It’s called AI. For all of the technology’s dazzling displays of prose, picture-generation, and problem solving, code is very much its most fluent language. As of April 2026, Google reported that human-generated code has dwindled to 25%. Tech companies with their own AI products are well-positioned in this environment. They own the tools to automate software engineering and can directly profit from others doing the same. Smaller software companies, however, face a more precarious outlook. The mere prospect of a DIY software future has turned investor sentiment against the Software as a Service (SaaS) businesses, raising predictions of a “SaaSpocalypse” in the process. Why pay for expensive enterprise software when you can build it yourself in-house? To see this trendline in action, look no further than two funds: Invesco QQQ Trust (QQQ) and iShares Expanded Tech-Software Sector ETF (IGV). QQQ is made up of the 100 biggest non-finance companies listed on the Nasdaq stock exchange. Filtering out financial firms means it’s heavily concentrated in broad-based technology companies like Alphabet (Google), Amazon, and Microsoft—all mighty players in the AI investment boom. IGV, meanwhile, primarily holds the software industry, including Salesforce, Adobe, and Intuit. While many of them are racing to integrate AI into their products themselves, they don’t own the underlying technology. These two funds have historically moved in lockstep. As goes software, so goes the broader technology sector. At least until recently. Something snapped late last year, and that correlation broke down. That something was Claude Code, an AI coding tool from Anthropic that went mainstream in late 2025. Its significance for markets lies in what it signaled: AI “agents” could soon handle complex workflows that businesses currently pay SaaS to manage. The investment research firm Citrini added fuel to the fire in February 2026, with the release of“The 2028 Global Intelligence Crisis," a report that imagined a near future where AI agents steal the market share of not just SaaS companies—but major tech and finance firms, too. For all of its alleged shortcomings in sound macroeconomic thinking, the paper went viral and moved markets. Taken all together, software stocks have experienced significant downturns over the last 12 months. With valuations in the software space having reset considerably, there may now be more cushion against further downward price pressure. Many of these businesses are also actively adapting their models—so, it would be premature to count them out. The chart below compares the price-to-earnings ratios currently to those at the beginning of 2025 for a sample of the largest software companies in the world. Stocks like Adobe and Salesforce are trading at a 50% discount now relative to early 2025, based on this valuation metric. More generally, with all of these uncertainties and headwinds out there for sectors like software, why is the market near all-time highs? Some of that resilience may reflect investor momentum, but the more fundamental explanation lies in strong corporate earnings growth. The primary source of investment returns over the long-term is growth in net income—companies' ability to become more profitable. Even as the war in Iran has been going on, analysts have revised their 2026 earnings growth estimates upwards. That's true across the board, with the U.S. as well as firms in Europe, Japan, and emerging markets forecasted to see an acceleration in profit growth. In spite of the headwinds from the conflict in Iran, this earnings backdrop remains a meaningful tailwind for clients holding diversified portfolios with a long-term investment horizon.