Market Divergences: A Note to Clients
March 1, 2026
Today’s stock market reminds me of the opening line of A Tale of Two Cities: “it was the best of times, it was the worst of times.” There are several divergences in the market worth noting.
The public markets have been making new highs. At the same time, private equity is really struggling to provide good returns to investors and to raise new funds. This weakness is reflected in the stocks of leading private equity firms, such as Blackstone or KKR. Blackstone printed above 190 last September and has dropped down to about 121, a decline of 36%. Similarly, KKR printed above 152 in September and is now down to 101, down 34%. That suggests some likely decline in the value of portfolio companies. According to CNBC, PE firms returned only about 14% of the money they’re managing back to investors in 2025. It begs the question of whether public and private valuations and corresponding prices will meet somewhere in the middle.
Another divergence is between AI-related stocks, broadly defined, and the rest of the market. The dynamic there is changing as well. Until recently, AI stocks could do no wrong. Now the mentality has shifted. First of all, AI stocks may be spending too much on capital investment without any assurance of sufficient return from that. Second, AI is seen to be devouring the software stocks because AI can either write software or render it obsolete. Hence Microsoft printed above 550 in October and is now below 400, a decline of 28%. We got stopped out of some shares of Microsoft at much higher levels just as a matter of investment discipline, and I must admit that I thought “yikes, what have we done?” But often there is information in prices themselves that may not become apparent until later.
A third divergence is between large cap and small cap stocks. Small stocks have been out of favor for many years after having led the market through much of 2000-06 and 2009-13. After a number of disappointing years, small stocks have been leaders this year. The Russell 2000 index has risen by 6 percent while the S&P 500 index at this writing is roughly flat.
A smaller divergence exists between short-term interest rates and long-term rates. While Trump has tried to bully Powell into cutting rates, the Fed cannot control longer-term rates. Since Thanksgiving, short-term interest rates have fallen by about 30 basis points. But long-term rates have not followed as much as the Administration might like; they have fallen by only about 10 basis points. The most recent Producer Price Index, just released, showed a year-over-year increase of 2.9% while core wholesale prices accelerated to 3.6%. The most recent monthly release showed a 0.8% gain, not a healthy trend. This data was released after the State of the Union Address.
One other divergence strikes me: that between sharply rising gold and sharply falling bitcoin. What does that have to do with stocks? I am concerned that rapid declines in bitcoin may trigger margin calls in that space that lead to liquidation of some stocks in order to raise the cash to meet those calls. As an aside, I don’t see how something that fluctuates several percent a day can be seen as a reliable store of value. It may be a convenient way of paying for certain items, often things on the black market or otherwise questionable. But I don’t see it as helpful to stocks right now.
One more. There is a divergence between consumer confidence and consumer spending. Spending remains high while confidence has sunk. If the spending does not last, well, that would not be good for consumer stocks.
These divergences, combined with warnings from some noted and very successful investors, give me a little bit of pause. Warren Buffett has more cash than ever. Ray Dalio, who founded the largest hedge fund in the world, has warned that the US is heading into “very dark times.” It is true that Dalio has been bearish for quite some time. It reminds me that Alan Greenspan warned of a speculative bubble in 1996, which was three and a half years early.
This is the first time in over 25 years that I have suggested to some clients that it may be time to take a slightly more cautious stance by employing a somewhat more conservative asset allocation. Of course, rapid transitions in taxable accounts do have a cost. But part of this is simply that as we get older, it becomes less likely that we will recoup all of the funds lost in a severe market decline. Others say that the market “always comes back.” True. But they don’t say when. There have been entire decades in which the overall return on stocks has been minimal.
It is fair to say that PE ratios should be higher than their historical norms because AI can grow far faster than assembly lines can increase their speed. But just as growth is higher in this environment, the disappointment would be compounded by the combination of lower earnings estimates and a more compressed PE ratio. Case in point: Nvidia delivered year-over-year earnings growth of 98% this week, and the stock fell. Imagine if they had announced an earnings shortfall.
I still see Nvidia as a leader in the AI field that can’t quite keep up with all the demand for its product. Similarly, I see Caterpillar as a company that should continue to profit enormously from the demand for new data centers. Steel stocks have had a little run. Health care stocks beyond biotech are reviving.
Rotation can be healthy in a market. Back in 2000, as tech stocks crashed, it was nice to have other sectors such as housing doing well. There are generally bright spots in any market environment. Right now, biotech stocks are coming alive after doing almost nothing for a decade. This stands to reason in part because AI is helping companies diagnose diseases and identify potential treatments or cures more quickly than ever.
We are appreciably ahead of the S&P 500 so far this year. I like to think that it is a combination of good stock selection and appropriate risk management. We have tried to rotate sectors somewhat, while being mindful of tax consequences in taxable accounts. But like anyone else, we don’t know what we don’t know, and that is part of the reason to make sure that we don’t get too far out over our skis. For example, we don’t know, at least as of now, what happens in Iran, but we do know that the prospect of war is not good for stocks.
As usual, you will get a quarterly update from my staff in another month or so. But I try to convey some of my own thoughts periodically as well. I hope they are useful. For additional perspective, Berkshire Hathaway is expected to publish its first annual letter this weekend that is not authored by Warren Buffett.
I’m always around by phone or email to discuss anything that you may wish to discuss.
Warm regards,
Tom