By Eric Parnell
“Trouble, Trouble, trouble, trouble, trouble, Trouble been doggin’ my soul Since the day I was born Worry, Worry, worry, worry, worry, Worry just will not seem to leave, My mind alone” –Trouble, Ray LaMontagne, 2003
Trouble is building on the horizon for capital markets.
Now I should preface everything that comes after with the following caveats. The U.S. stock market is a solid four-day rally away from new all-time highs. Markets have unquestionably been unrelentingly awesome over the last few years.
But in my role as Chief Market Strategist for Great Valley Advisors Asset Management (GVAAM), part of my job is to identify and focus on potential downside risks confronting financial markets. My priority is to find what could possibly go wrong and determine what can be reasonably done to protect against these outcomes in protecting our clients. Put simply, worrying about potential trouble stays in my mind just as much as seeking upside opportunities.
Since the summer of 2023, I have been emphatic in stating that the number one downside risk for financial markets is a renewed rise in inflation. We had a nasty inflation outbreak that began picking up steam in 2021 and became a full blown problem in 2022, as the Russian invasion of Ukraine essentially heralded the definitive end of the four decade bull market in bonds that began all the way back in 1981. As the world continues to rack up massive sovereign debts as we move away from globalization to spheres of influence (United States, China, Russia), the path of least resistance for prices is no longer disinflation/deflation, but instead inflation.
So is a renewed rise in inflation the trouble that is potentially threatening financial markets as we wind 2026 to a close and enter 2027? Honestly, probably not despite all of the handwringing we’ve been hearing in the financial media since the outbreak of the Iran conflict earlier this year. Yes, it cost a lot more to fill out tank at the gas pump today, but we must remember that we were paying more per gallon of gas back in the summer of 2008 and we didn’t have an inflation problem back then either. Put simply, it’s not the 1970s, as our economy has completely adapted since then. And putting actual data behind this notion that a renewed rise in inflation is not at the heart of potential market trouble today, one has to look no further than the 5-Year Breakeven Inflation Rate, which is the average inflation expected by the market over the next five years based on market pricing. We see in the chart below the inflation outbreak of 2021 into 2022. We see no such pattern even starting to form today.
“Got so much to lose. Got so much to prove. God, don’t let me lose my mind” –Trouble, Cage The Elephant, 2015
Trouble. Kill the suspense Parnell! So what is the trouble if it’s not inflation? It is the looming end of the technology party that has lifted the stock market for the past decade and has culminated in the climax of the AI boom over the past three years.
“Technology stocks go down?” you might understandably scoff. Yeah, I know. But it is easy for investors to forget that there was once a time not that long ago that tech stocks were chronically dead money. For example, during the seventeen-year period from 2000 to 2016 when the S&P 500 increased by +110% in value, the S&P 500 Information Technology sector returned essentially flat to negative. And seventeen years is not an inconsequential period of time. “Wait!” you might exclaim. “Your cheating because your choosing the bursting of the technology bubble as your starting point for this comparison”. Fair counterpoint, but even if we set our starting point a decade later in 2010 in the aftermath of the financial crisis, we see that tech steadily trailed behind the S&P 500 Index. It was not until 2017 that the tech sector regained its verve.
If one thinks about it, considering tech in 2026 in the context of 2000 might not actually be a bad idea. Ignoring the unprofitable dot.com garbage from the time, the equivalent “Magnificents” of the time were Microsoft, Cisco Systems, Intel, Oracle, IBM, Lucent Technologies, Nortel Networks, Dell Computer, Sun Microsystems, Yahoo!, America Online, and JDS Uniphase. Profitable all (except Nortel). Many were prolific free cash flow generators. And a few are still relevant a quarter of a century later today. Unfortunately, the rest have disappeared into varying degrees of irrelevance since.
So why does any of this matter today? And why potential trouble now after so many years of banging market returns?
First, the AI driven trade may already be done. Consider today’s “Magnificents” of NVIDIA, Apple, Alphabet, Microsoft, Amazon, Meta, Tesla (I’ll even throw Broadcom in the mix for kicks and giggles, as they too are a top 10 market cap company today). While the S&P 500 Index is higher by +11% since Halloween 2025, this “Mag 8” is essentially flat to negative over the same time period. Two or three months is a pause that refreshes. More than 10 months and counting is a burgeoning shift in leadership. But what about the broadening of tech leadership beyond the mega cap giants? A look at the broader Russell 1000 Growth reveals that the go-go growth trade in general has also fallen flat, as the growth benchmark is actually trading lower by -1% since last Halloween. Markets may be going higher, but it’s not the AI tech trade or growth stocks more generally driving the gains. Instead, it’s the boring old Russell 1000 Value side of the market, which is up +25% since Halloween last year. Zzzzz.
Next, what about profit growth? You Parnell are always talking about how corporate profit growth is the primary driver of stock market returns. And we keep hearing that corporate profit growth has been running at a +20% clip on the S&P 500 over the last several quarters driven primarily by the tech sector. With such phenomenal profit growth, won’t tech stocks eventually get back in the market leading game? Perhaps, but let’s refer back to the year 2000 once again. Consider the annual profit growth on the S&P 500 for the following quarters:
- 1999 Q4: +28%
- 2000 Q1: +33%
- 2000 Q2: +27%
- 2000 Q3: +22%
- 2000 Q4: +4%
- 2001 Q1: -11%
The key takeaway: investors were equally basking in the glow of ripping profit growth on the S&P 500 in the year 2000 despite the fact that the tech stock (ex dot.com) price returns had fallen flat. And it wasn’t until investors were squarely in the jaws of the next bear market during 2001 Q1 earnings season in April/May 2001 that they were starting to see a negative corporate profit growth print requiring evasive action. It’s worth mentioning as well that these were still positive free cash flow companies that were not taking on a lot of debt. Today, we have the breath taking profit growth and the flattish tech stock performance, but it’s now playing out with companies that have turned free cash flow negative and are spending out their eyeballs on AI build out (century bond? Really Google? I want to lend you money for a hundy years for technology that is going to be obsolete by the time the milk in my fridge expires? C’mon).
Continuing, investors with a once seemingly insatiable risk appetite are starting to show signs of getting full. Cryptocurrencies, whose price performance is alarmingly highly correlated with that of the tech heavy NASDAQ 100, have fallen by as much as -50% or more since not coincidentally Halloween 2025. Trouble. Another sign of increasing investor risk aversion, the spreads on CCC and lower US high yield debt relative to comparably dated US Treasuries (that have been struggling in their own right as of late) has recently blown out above +10% to levels last seen when everybody was freaking out about tariffs more than a year ago in early 2025. If investors are becoming increasingly reluctant about taking on risk, the prices of the stock market assets that are most speculative like those connected to the AI boom are next at the front of the queue.
Lastly, we are seeing some potential signs of a technical breakdown in markets as of late. For example, consider the chart of the equal weighted S&P 500 Index, which I have been lauding for some time for its relentless movement to the upside as the market cap weighted S&P 500 continues to grind. It cut decisively through its upward sloping 50-day moving average medium term trend line three days ago. It is looking to catch its footing at its 100-day moving average (orange line in the chart below), but we have seen similar and more sustained downside breaks in US mid-cap and small cap stocks (both already trading below their respective 100-day moving averages). Such technical breakdowns, particularly during the historically challenging month of September, are immediate reasons for pause if nothing else.
“Like a bridge over troubled waters. I will lay me down.” –Bridge Over Troubled Waters, Simon & Garfunkel, 1970
OK. So let’s say the AI driven tech trade is grinding to a halt and could rack up a down double-digits correction in short order that could weigh on the broader market. What is an investor to do?
First, nothing. Investors seeking to time the market do so at their peril, and it is very possible that we could see tech shares continue rockin’ and rollin’ and whatnot through the rest of the decade. Moreover, a properly constructed asset allocation portfolio that is broadly diversified in managing correlation risk should be ready to manage the downside associated with a specific allocation segment within the overall model (this sentence is not nearly as fun as the Grease reference dropped in the last sentence, but we try to mix it up).
Second, any adjustments should be made incrementally on the margins over time. For example, in the GVAAM model portfolios, our recent rebalance saw us continue to maintain our style neutral balance between growth and value while marginally increasing our weighting to non-US equities (a shift we first initiated in 2023 and have been carrying out gradually over time) and shortening our fixed income duration (once again, a shift we initiated in 2024 and have been carrying out gradually over time).
Lastly, continue to maintain a balanced perspective on the markets going forward. Just as the technology software industry was not going to tumble into oblivion because people woke up to the idea late last year that AI may put a few computer programmers out of work, history has shown us time and time again that both cyclical and secular market shifts do not happen in a day but over time. And this includes the most dramatic events in stock market history including the stock market crash of 1929 (happened in October 1929, market essentially revisited its previous highs six months later in April 1930), the bursting of the tech bubble (burst in March 2000, but returned to previous peaks six months later in September 2000), and the financial crisis (markets peaked in July 2007, but really didn’t start falling to the downside in earnest until October 2008). The key is not reacting when a downside market event takes place, but being mindful and watchful as the market unfolds over time for any potential downside risks that might be developing in the future and preparing accordingly. Worry, worry, worry, worry. That’s my job.
Bottom line. Trouble is building on the horizon for capital markets, but it doesn’t necessarily mean that bad things will come to pass. Continue to monitor investment markets with clear eyes and use history as a useful reference. And continue to maintain a focus on broad portfolio diversification and sticking to your long-term investment philosophy over time.
Eric Parnell, CFA | Chief Market Strategist
Eric Parnell is the Chief Market Strategist for Great Valley Advisor Group. Eric applies his expertise in finance and economics to manage multi-asset portfolios, mitigate risk, deliver advice that promotes informed decision-making, and facilitate investors achieving their short-and long-term investment goals. He leads the GVA Asset Management platform overseeing the management of asset allocation models for GVA advisors and their end clients. Eric also provides economic, market, and investment related analysis and communications to the GVA network of advisors and clients as well as the broader financial media. Eric has appeared on CNBC, CNN, Money Matters TV, NPR-Marketplace, Seeking Alpha, and CFA Magazine.
Eric has more than 25 years of financial and investment experience. Prior to joining GVA, Eric was the Founder and Director of Gerring Capital Partners, a Registered Investment Advisor serving clients nationwide. Eric also previously served as the Director of Investment Communications for SEI Investments and as an Economist at Moody’s Analytics. Eric is also an active member of the CFA Society of Philadelphia and the Global Interdependence Center.
Disclosure: I/we have no stock, option, or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Investment advice offered through Great Valley Advisor Group (GVA), a Registered Investment Advisor. I am solely an investment advisor representative of Great Valley Advisor Group, and not affiliated with LPL Financial. Any opinions or views expressed by me are not those of LPL Financial. This is not intended to be used as tax or legal advice. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Please consult a tax or legal professional for specific information and advice. LPL Compliance Tracking #1173867
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
