The primary driver of daily market gyrations has shifted from geopolitical headlines on the Middle East toward reexamining the greater context of the AI boom and its broader impact on the global markets and economy.

As volatility eases and earnings remain resilient, the investing environment has improved since the uncertain fragility of the Middle Eastern conflict began. BlackRock recently moved back to an overweight view on U.S. equities. Thus far, earnings have been good, with AI-related growth continuing to support sentiment. Investor flows, corporate buybacks, and a supportive technical backdrop have all helped stabilize investors’ risk appetite after the brief geopolitical freak out.

This is the kind of environment where investors let their guard down because the line has gone back up and many signs point to the all-clear ahead. Really it is pointing to all clear behind. We never know what is ahead.


Illusion of a Broad Market Recovery

While the S&P 500 continues to show strength, market leadership remains incredibly narrow. Nearly half of the stocks within the index are negative year-to-date, creating a disconnect between the headline numbers and the average stock's performance.

With the 10-year annualized return for the S&P 500 sitting near 15%, it has become extremely easy to judge every strategy through a single lens: How much of the S&P did investors capture? 

This is too narrow a standard.

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Of course, up-capture matters. Investors should expect credible participation when the good times roll, but up-capture cannot be assessed on its own. A portfolio should also be judged by a more comprehensive set of metrics to ensure long-term resilience:

  • Downside capture: How much of a market drop did the portfolio absorb?
  • Maximum drawdown: What was the peak-to-trough decline?
  • Recovery time: How long did it take to get back to even after a loss?
  • Correlation during market stress: How did the assets move in relation to one another, opposite directions to lockstep.
  • Return Consistency: Did the strategy perform over a full market cycle?

Part of the equation is recognizing the distinction between relative returns (on target compared with peers) and absolute returns (meeting specific investor objectives) which is often lost on clients, and understandably so. If an investment is pitted solely against the S&P 500, analysts ask: does it make sense for it to be anything other than an S&P index fund?

Our brains are wired to seek the path of least resistance, and even the most curious investors may lack the tools and abilities to analyze complex drawdown patterns or risk-adjusted outcomes. Communicating the importance of context requires effort, an easily followed narrative, and the client’s trust. 

While the AI frenzy suggests U.S. equities may continue to cruise. Earnings have held up better than expected. Volatility has come down. Risk appetites have returned more quickly than expected. But none of these changes the core issue: a favorable short-term setup does not eliminate the need for disciplined portfolio risk management. A rising market just makes discipline easier to dismiss.


Explaining the Context to Clients 

"Performance matters. It always will, but the path toward long-term investing success matters too."

Over time, a resilient portfolio that helps investors compound with fewer damaging declines may prove more valuable than one that simply looked strongest in the rearview mirror during a period of market momentum. Ultimately, managing the investing journey is just as critical as reaching the destination.

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About the Author

Eben Burr is the President of Toews where he helps oversee the culture and direction of the firm which specializes in creating strategies designed with the clients financial and emotional wellbeing in mind. Eben has worked in various capacities at Toews since 2009 and before that in real estate in New York City. Eben advocates bringing behavioral psychology, introspection, and empathy into portfolio construction, planning, and communication.  He has a BA in history, studied architecture in Paris, has a master’s degree from Pratt in New York and now lives in Manhattan with his wife, son, and lots of guitars.
 

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