Back
A small part of me is disappointed I won’t get to see one country invade another one where they already have a large military base. But, that aside, the resolution of whatever the Greenland problem was has given the equity market room to continue its strong start to the year.
In December plenty of people who do my job write their 2026 outlooks. Often, by this time of the year, things have happened and we are quickly rewriting and revising our convictions. Not this year. If I could sum up the December consensus view (which we broadly shared) it was:
- Global growth should stay firm helped by rate cuts and (US) tax cuts
- This should be good for the more cyclical parts of the market including small and mid-caps and emerging markets
- Bond markets have plenty of two-way risk in them if global growth does accelerate
- Often, this sort of economic scenario sees a weaker US dollar
This (bar the weaker dollar) is very much how the first few weeks of the year have felt. For example, here are year-to-date returns for a few selected equity markets. I cannot remember the last time US mid-caps led this list:
You might also notice that the US technology giants that powered market returns in 2023 and 2024 are down for the year. Part of this is that expectations are so high for this group that it does not take much to disappoint. We sold some of our ETF exposure (which is heavily weighted to the familiar US technology giants) and added to EM this week. But I am not yet ready to throw in the towel on all things US large cap yet. The pace of AI change is not slowing down. Claude Code, for instance, is radically changing the job of a software engineer from writing code to instructing an AI to write the code and checking the (pretty much instant) output. The productivity benefits here are potentially enormous.
And we are, indeed, seeing the impact of this on equity markets. There are plenty of companies built on monthly subscriptions to use their software (“Software as a service” or Saas in the jargon). If you can easily write your own software it is hard to get too bullish about the outlook for companies in the business of software writing. To illustrate the Morgan Stanley Saas Index is down almost -30% in the last 12 months (the stodgy old UK All-Share Index is up 22% for comparison).
Small and mid-caps are, of course, helped by better growth and falling interest rates. But one other potential bull case is that the benefits of AI fall disproportionately to them. Lower technology costs (as in house, home-built AI tools do more) should help the bottom line and, in theory at least, smaller companies should have better flexibility to implement them. The market has assumed so far that the economic benefits of AI will accrue to the chipmakers and AI companies that provide the service. If instead, it helps ordinary non-technology companies improve their margins then the moves we have seen so far this year will have more room to run.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
