My childhood was typical. Summers in Rangoon...luge lessons. In the spring, we'd make meat helmets. When I was insolent, I was placed in a burlap bag…Pretty standard, really.
Dr. Evil in Austin Powers: International Man of Mystery (1997)
Executive Summary
While the equity market has felt to some like it may have been beaten with a reed in a burlap bag, the headline numbers don't always tell the full story. Leadership has broadened away from U.S. growth. The Russell 1000 Growth is down (-5.3%) but many areas of the US equity market are up solidly.
The Russell 2000 Small-Cap Index is up 5.8% and the Russell 1000 Value is up 6.1%. International is once again leading the charge with the MSCI EM and EAFE leading year-to-date returns with 12.8% and 8.6%, respectively.
Cyclicals are carrying the tape: Energy, Materials, and Industrials are the top YTD sectors, while Consumer Discretionary, Information Technology and Financials are lagging.
Bonds are doing their job again: core fixed income categories are positive YTD, reinforcing the value of diversification while equity leadership rotates.
If you’ve seen the scene, Dr. Evil describes a childhood that sounds completely unhinged, then shrugs it off as routine. That’s a decent metaphor for markets right now. A software-led drawdown inside technology has quickly turned into a broad “AI kills software” narrative, geopolitical headlines have reappeared with uncomfortable frequency, and private credit is reminding investors that “daily liquidity” and “illiquid assets” don’t always coexist peacefully. None of these risks are brand-new. What’s changed is the market’s sensitivity. Like Dr. Evil’s autobiography, the market can make something sound awful while the numbers tell a more nuanced story.
Jobs Growth and the Consumer
One reason the AI narrative is sticking is that it intersects with a labor-market story that’s already cooling at the margin. Recent commentary has pointed out that job growth over the last year has been comparatively light versus the post-pandemic surge (with total job gains in 2025 described as the weakest since the early 2000s), and forward expectations don’t assume a meaningful re-acceleration. That matters because consumer spending is still the economy’s main engine, and the consumer is ultimately funded by paychecks and confidence. The market can look through “creative destruction” for a while, especially if productivity gains show up in margins, but if job growth softens at the same time that investors worry about white-collar displacement, the result is a wider range of outcomes and a bigger risk premium. In other words: AI may be a long-term tailwind for parts of the economy, but in the near term it can still translate into choppier sentiment as investors try to separate productivity upside from employment-side friction. If hiring cools but wages hold and inflation behaves, the market can live with slowdown but it struggles with slide.
AI Anxiety in Software
Recent price action in technology has been shaped less by fundamentals and more by a narrative shock particularly in software. The market has started to act like every “agent,” copilot, and “do it for me” workflow is about to walk into the chief information officer’s office and replace the entire application stack by lunch. That’s a powerful story, but it’s also the kind of story markets love because it’s simple, clean, and dramatic. Therefore it is rarely accurate.
A more practical way to think about it is the dot-com template: the internet didn’t eliminate retail, it forced a harsh sorting process. Weak business models got exposed, strong franchises adapted, and the winners ended up stronger than before. We think AI is setting up a similar shakeout. Some software categories will absolutely feel pressure. Those most vulnerable have products that are essentially “content + optimization” or “dashboard + interpretation.” But a large portion of enterprise software isn’t a nice-to-have; it’s the system of record. Compliance, security, governance, workflow accountability, audit trails. These aren’t features you casually outsource to a probabilistic model and hope for the best. In other words, AI can be a very capable assistant, but it’s not your controller, your general counsel, or your chief information security officer. Pretty standard, really.
This is also why the selloff has felt like every software company has been shoved into a burlap bag for punishment. A lot of the pressure has landed on software broadly, even when the underlying AI risk profile is very different by subsector. Some areas may be replaced many, will coexist, and a few are likely to be enhanced as AI adoption accelerates. Cybersecurity is the obvious example: more automation, more attack surface, more demand for defense. Data management is another: AI is only as good as the data it can access, organize, govern, and secure. If we’re going to be making “meat helmets” for portfolios, those categories are at least the right kind of protective gear.
While software was taking its luge lesson, the rest of the market quietly rotated into value, cyclicals, and overseas. Even in the areas most exposed to the narrative, it’s worth remembering what markets do in dislocations: they overshoot, then they argue about where normal is supposed to be. The software complex has already absorbed a meaningful drawdown, and valuation multiples have compressed. That doesn’t guarantee a bottom tomorrow morning, but it does suggest the debate is shifting from everything is dead to what survives, what adapts, and what gets repriced. The answer is unlikely to be none of the above. We view this as a rotation, not a referendum: we can stay overweight growth while broadening within growth and supplementing it with value, small cap, and international diversifiers.
None of this is an argument to ignore diversification. Far from it. It’s an argument that diversifying doesn’t have to mean abandoning tech. After a multi-year run dominated by a narrow group of mega-cap winners, it’s healthy to see leadership broaden and for other parts of the market to carry the baton. But if you exit technology wholesale because the headlines are scary, you risk selling durable cash-flow franchises at precisely the moment sentiment is doing its burlap-bag thing. Importantly, this still fits a mid-cycle, slowing-not-stalling backdrop; the challenge is that dispersion is rising, so the ride feels rougher than the index. Historically, the best long-term outcomes tend to come from owning the businesses that can adapt, not from trying to time the market’s mood swings.
Geopolitics and the Risk Premium
Geopolitics is adding another layer to those mood swings. Iran has re-entered the conversation as an uncertainty amplifier: protests, internal instability, and the ever-present question of whether escalation spills into energy markets. Even when nothing happens, the market prices the possibility that something could happen, and it does so quickly. That tends to show up in higher volatility, a fatter risk premium, and an energy (crude) tape that can move on rumor, not just on barrels.
Mexico is another reminder that risk isn’t always neatly contained. The reporting around cartel violence, roadblocks, burning vehicles, disruptions to travel and commerce, matters not because investors are trading Mexico tourism day-to-day, but because friction has a way of showing up in unexpected places: logistics, nearshoring optimism, confidence effects, and the political response function on both sides of the border. Markets can normalize almost anything. Until they can’t. Pretty standard, really. Right up to the point it isn’t.
Private Credit and Liquidity
Private markets deserve a similar level of respect, especially private credit, where the last few years have trained investors to expect stable marks, steady yields, and very little drama. The reality is that liquidity has been one of the defining fault lines of this cycle. Underwriting became more competitive, covenants got looser, and spreads tightened even as risks rose. That’s manageable when capital is abundant and refinancing windows stay open; it gets more complicated when the market is reminded that private and daily liquidity are not natural roommates.
The recent activity around Blue Owl has become a useful case study in how this plays out in the real world. We’ve seen high-profile transactions designed to create liquidity and rebalance portfolios: sales at or near fair value, return-of-capital mechanics, and a renewed focus on aligning structure with underlying asset liquidity. The takeaway isn’t that private credit is bad. Far from it. The takeaway is that private credit is a wide spectrum, and structure matters. In a calm market, everyone’s liquidity policy looks pretty standard. In a stressed market, you learn what it really means. We view this less as crisis and more as a reminder that structure, gates, and underwriting discipline matter; exactly why we keep liquidity buffers and diversify.
That’s also why we continue to see more opportunity, particularly for experienced managers, on the true smaller end of the middle market (sub-$20 million EBITDA). This part of the market is often less efficiently priced and more relationship-driven, with fewer mega-funds forced to deploy enormous checks on tight timelines. Done well, that can translate into better structuring, stronger covenants, and a wider dispersion of outcomes. In other words, doing the work matters, but the payoff for doing the work can be meaningfully better. If the big end is a crowded luge track, the smaller end can still offer lanes where fundamentals, not traffic, determine your speed.
Policy Uncertainty: Tariffs
Policy is the final ingredient in this particular stew. Tariffs are back at the center of the conversation, and the market is trying to handicap not just the level of tariffs, but the legal pathway, timing, and durability. Recent court developments have challenged the use of broad emergency powers as the basis for sweeping tariffs, while other statutory tools remain available for temporary measures and longer-term processes. Translation: policy uncertainty itself becomes part of the cost of capital. It can pressure multiples, complicate corporate planning, and create sudden rotations between beneficiaries and victims depending on which industry the market thinks will wear the bill.
Portfolio Takeaways
Put it all together and the message is less dramatic than the headlines and much more useful. We’re in a period where narrative shocks (AI), geopolitical shocks (Iran/Mexico), and policy shocks (tariffs) are all competing for attention at the same time. That’s exactly the kind of environment where diversification earns its keep. It is not a retreat from growth. It is a way to maintain exposure to durable themes while reducing reliance on any single storyline. This is consistent with a mid-cycle base case. The economy is slowing, not stalling, and dispersion and volatility are normal features, not bugs. It also reinforces a simple principle: liquidity is not just a feature; it’s a tool. In drawdowns, liquidity gives you choices. And having choices, in markets, is about as close to “pretty standard” as anyone can ask for.
Louis Tucci; Partner | Senior Investment Advisor
Paulo Aguilar, CFA, CAIA; Partner | Senior Investment Advisor
Mark H. Tucker, CFA; Chief Investment Officer
Chuck Bettinger; Portfolio Manager
Securities offered through Arkadios Capital. Member FINRA/SIPC. Advisory services through Arkadios Wealth.
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