Beware of Investment Narratives, Inflation’s 2nd Act and the AI Scare Trade

So far 2026 is off to a slow, be it volatile, start. And I am talking strictly about markets, of course. It’s a bit early to put up year-to-date numbers, as we are just at the top of the 2nd inning, but thus far we are seeing the continuation of a trend that started last year, with the US stock market being bested by other markets and asset classes. I am not rooting for that, to be sure. However, it does benefit investors who are diversified – for good reason – but who like market-beating performance. Don’t we all?

The Market Leaderboard

The year-to-date performance ranking is almost identical to 2025, with the only exception being that US stocks have moved from the middle to the bottom of the pack. One interesting thing to note is that if you look at US value stocks – companies that don’t grow earnings fast but are cheap – those have outperformed the US stock market as a whole, as measured by the Dow Jones Industrial Average, which is up 3% so far in 2026. 

Source: Y-charts.

Alternative Narratives

Remember when Kellyanne Conway unintentionally coined the phrase Alternative Facts when discussing inauguration crowd sizes? It all seems so quaint in retrospect. Well, facts should be understood as the truth, but narratives have no such constraints. Narratives drive investor enthusiasm (or lack thereof). One narrative in 2025 was that AI represented the defining investment theme of the moment, and investors were well served – and justified – in jumping in; perhaps even foolish not to. That is not necessarily untrue, but it certainly became what they call a “crowded trade,” with the top 5 AI-themed stocks – Apple, Nvidia, Microsoft, Alphabet, Amazon – now representing 28% of the S&P 500 Index’s market value. Note that these same stocks were wrapped in similar tech-takeover narratives in recent years. But why is there no competing narrative based on the fact that tech stocks have actually lagged some other asset classes recently?

This headline, though completely factual, doesn’t fit the current investor narrative around AI and thus  will be largely ignored: “Emerging market stocks trounced tech stocks in 2025 with the MSCI Emerging Index posting 1.5x the return of the Nasdaq Composite Index.” 

One aspect of a narrative is that it has reached critical mass and crowded out other would-be narratives. Therefore it leaves little room for dissent. I think investors who just follow the narratives leave money on the table, but it does provide the comfort of being part of something big and buzzy. That comfort, however, comes at a price because the market implicitly demands more of your money for a dollar of future earnings from a market darling than from say an emerging market stock. Because this tendency to covet the shiny object is so innate to human nature, the opportunity will likely always exist to get a bargain on something that looks a little dusty and needs a good polishing.

Another would-be narrative that never took off: “clean energy stocks are trouncing fossil fuel stocks, political headwinds notwithstanding.” That statement is true, however, with clean energy stocks delivering a 47% return in 2025 vs 7.9% for the traditional energy sector, as measured by the iShares Global Clean Energy ETF (ICLN) and the State Street Energy Select Sector ETF (XLE), respectively. Had it been the other way around, the narrative would have stuck, because it makes intuitive sense to people. 

What is the takeaway of all this narrative business? We should think for ourselves. Headlines are not necessarily the best investment strategies because if everyone agrees with your thesis, you risk overpaying for the investments you make and ultimately your profit is the difference between what you sell something for and what you paid for it.

Inflation Is Down but Maybe not Out

Recent inflation prints have been welcome news, as they suggest inflation is coming under control, at the same time that the labor market seems to be holding up better than expected, with robust hiring and low unemployment. However, it might also be a head fake. Economists who expected inflation as a result of tariffs, did not necessarily think the inflation would show up immediately, but might take a year plus to materialize. In other words, it is too soon to declare “mission accomplished.”

JPS, AI-generated

There are three drivers that I think of, when I have some doubt that inflation has been tamed:

1. Tariffs. Yes, the worst of it is probably over. The big tech CEOs bent the knee (before, during, and after) and got their carveouts. Your next i-phone is tariff-free. Furthermore, the Supreme Court just invalidated by a vote of 6-3 the tariffs imposed under the International Emergency Economic Powers Act (IEEPA). Finally,  reciprocity – where other countries return fire with fire – has not come to pass. But, even so, tariffs post-Supreme Court ruling are still estimated to be 8-9%, according to the Budget Lab at Yale. That drops tariffs back to their highest since 1973 and still materially above the 2.5% rate that prevailed in early 2024. 
   
   So far, companies have borne the brunt of the tariffs. Economists were surprised by that, but in hindsight it makes sense. Passing on the cost to the consumer right away, is a risky and somewhat irreversible move and it is rational that companies would hesitate to do so, waiting to see how it all plays out. However, a decision to hike prices is not forever postponed, absent a complete reversal of tariffs or a recession.
   
2. De-globalization. Both the pandemic and the tariff episode have reinforced the need for countries to turn inward and reshore some manufacturing, curtail the export of critical commodities, and stockpile components like memory chips. The effect of this puts upward pressure on prices. Now, there are other factors that affect prices so it is hard to isolate the effect, but directionally it is inflationary.
   
3. Demigration. Researchers at Brookings and the AEI now project a U.S. population decline starting in 2026, accelerating the Census Bureau’s previous 2081 timeline for a shrinking population by over 50 years. This is a result of low birthrates, curtailed immigration, and deportations. The folks being targeted for deportation or barred from entering the US, are disproportionately employed or seeking employment in construction, agriculture, food processing, and hospitality. Why has the cost of the associated products and services not increased substantially yet, considering the reduced labor supply? The reason is pretty similar to that of the companies absorbing the tariff hit: uncertainty delays decision making. 
   
   For a hard-working, God-fearing Mexican farmworker to self-deport he has to uproot or leave his family. His kids might be in school or on little league teams. His wife might be pregnant. He may believe he can stay under the radar until it blows over, or he may trust that his local community will protect his family — as many communities are doing. In other words, the decision to upend it all is irreversible and it is only rational to delay that decision. That, in turn, leaves the person in the (shadow) workforce and delays associated cost increases were his labor contribution to be removed from the US economy.
   
   However, eventually, the writing on the wall becomes impossible to ignore and the worker in our example might pack up and leave, with or without his family, or he might run out of luck and be rounded up during an ICE raid and deported. With the passage of time, as delay becomes less feasible, this could happen a million times over, shrinking the labor force and putting upward pressure on prices. Again, that does not mean inflation spikes. Increased productivity and automation from AI might put downward pressure on prices, as would a recession. However, directionally, demigration is clearly inflationary.

Inflation matters not just in an academic sense, but also because it affects how people spend their money, invest their savings, and express their political preferences. As I am managing portfolios, I am being mindful of the potential for sticky inflation. This environment makes hard currencies and commodities more attractive. It also increases the likelihood that long-term rates will remain high despite further rate cuts from the Federal Reserve. Furthermore, rate-sensitive sectors like real estate and small caps will be challenged, while banks and insurance companies might profit from the spread between low deposit rates and high loan yields.

The AI Scare Trade

On February 3rd, Anthropics AI bot Claude made a news splash that sent the software sector into a sharp sell-off. If you haven’t met Claude yet, he is quite capable. Apparently he is not just a productivity tool that can assist with workflows, but can perform them, questioning the need for expensive products from Software-as-a-Service (SaaS) providers and IT services companies. As the news spread in early February, nearly $300 billion in tech market value disappeared overnight and billions more since then, as the sell-off deepened into a sector-wide route.

Personally, I think the scare is overdone but the selloff is justified. We are enthralled by the narrative of disruption: “technology disrupts business models, and AI does it at high speed and wide scope.” But that is too simplistic. If we are smarter and more productive with AI at our fingertips, it follows that businesses also have the opportunity to be more productive. The lawyer, the accountant, the IT provider, all become more productive, but they are still going to be subject matter experts, represent you in court, file your taxes, run your corporate tech stack and so on. Theoratically, they will do it better. 

Sure, if businesses don’t innovate and evolve to meet their customers’changing needs and preferences, they risk going out of business. But that was always the case. AI does not replace human intelligence; that’s not the point of it, or else we would all get less smart. It helps us do more things, better. AI can make us smarter, if we are willing and able to learn. It makes us more productive if we allow it to take over repetitive tasks and redeploy our time productively. If we use AI in that manner, then AI is a great leap forward. It will allow us to do our jobs better, create new jobs that we hadn’t even imagined, and make society more productive as a whole, which, with the proper policies, could raise all boats, not just those at the very top. That is decidedly not a story about “less”, as in wholesale destruction of industries and massive unemployment, but rather, a story of “more.”

The worst-case scenario, in my mind, is not massive unemployment or a collapse of the stock market value of all but the AI leaders, but lack of sensible regulation. If we allow AI to impair our social and emotional intelligence by supercharging social media and turning our brains into mush, then it seems revolutionary only in a dystopian sense. Certainly, at the dawn of the internet age we thought we might all get smarter with connected computers that eventually ended up in our pockets. Fast forward a quarter century and I don’t think we can unequivocally say that it was a leap forward in terms of human intelligence.

I am going a bit down the AI rabbit hole here, so let me circle back to the point I made about the market selloff in the software industry being justified. When stock values are as rich as they are today in the tech sector, it doesn’t really matter what the fear is, anything that casts doubt on the validity of sky-high valuations will act as the catalyst for a selloff. In that sense, I don’t think the recent repricing of software stocks was overdone.

Some Personal Reflection

If you’ve ever made it to the end of my newsletter, you will have noticed that I often sign off with a seasonal reference. A bit cheesy, but I always liked the weatherman growing up and now I occasionally get to play one. Recently, however, as I look up at the sky from my safe and privileged perch, I see dark clouds and occasionally struggle to make out the silver linings. But then I am reminded of what a brave girl named Anne, from my native Netherlands once said: “In spite of everything, I still believe that people are really good at heart.” It makes the optimist in me perk up. I believe we will reclaim our shining city on the hill. Immigrants have received so much from this country, it is true, and yet they have given immeasurably to it as well. It is that mutually beneficial relationship that has been our secret sauce for so long. It makes good human sense; it makes good economic sense.

Maybe I should stay in my lane and stick to financial topics, but investing is not just about math and statistics, it’s also about history, understanding human nature and reading society’s pulse. Neither as investors, nor as citizens, should we fear change, or abandon our principles. A proud and confident society is an open and welcoming one. “I was a stranger and you welcomed me.” (Matthew 25). It is ironic that some of the loudest voices in supposed defense of Western culture and Christianity are violating scripture and lack the confidence that Western civilization exudes through its openness. I am hopeful we can find our way back.

Kindly,

Jan P. Schalkwijk, CFA – JPS Global Investments