In Part 1 of this series, I introduced the idea of “the Great Reimagination", a shift from the rules‑based world we counted on to a more unpredictable, power‑based one where long‑standing alliances and trade patterns are being rewritten in real time. In Part 2, we shift the focus to markets themselves.

Key points:

  • The last 15 years of U.S. equity returns, especially the very high returns of a handful of mega‑caps, are unlikely to repeat in the same way.

  • “Magical thinking” assumes that markets always bounce back quickly and that yesterday’s leaders will win again tomorrow; I believe we’re entering a more normal, more demanding environment.

  • I’m responding by reducing concentration in the biggest names and leaning into smaller companies, global diversification, and the “picks and shovels” behind big trends like AI.

When Extraordinary Started to Feel Ordinary

Over roughly the last 15 years, U.S. equities have gone through their own kind of Great Reimagination.

If you started investing after the global financial crisis, your experience of markets has been extraordinary. From the 2009 bottom through the mid‑2020s, U.S. stocks delivered roughly double their long‑term historical returns. There were major shocks along the way—a pandemic, wars, inflation scares, interest-rate spikes—but each time the pattern was similar: markets fell hard, bounced back quickly, and went on to make new highs.

It would be easy to assume this is how markets are supposed to behave. I think this pattern has created an era of magical thinking in markets. An entire generation of investors has learned that you can keep touching the hot stove and never get burned.

It's been a great environment to live through. But it is not a reasonable baseline for the future. I know that investors are warned never to say, “this time is different.” But I think this time is different.

The next 20 years will not look like the last 20. I believe the era of magical thinking is coming to a close.

The End of Magical Thinking

Thinking about actual numbers helps. Over very long periods, U.S. stocks have earned about a 10% compound annual return1, an outcome that includes the 2009-2026 period of exceptional performance. Since the March 2009 bottom, they have delivered an astonishing 17% per year2, albeit from a starting point of very depressed valuations. You don’t get to have that forever. You either pay it back through a long stretch of lower returns, or through sharper, more painful drawdowns than people are currently prepared for. More typically it’s a combination of both.

The concentration in the biggest names is another warning sign. The Mag 7 are now worth almost $19 trillion3. Their combined market value is roughly the same as the bottom 433 stocks in the S&P 5004. Think about that. All of the brands and companies embedded in your daily life - Campbell's Soup, Pepsi, McDonald’s, Verizon, Caterpillar, JPMorgan, Boeing, Smucker’s, IBM... and 424 more… are, combined, worth about the same as just the seven biggest-cap companies. Numbering among the bottom 433 are all of the companies that feed you, connect you, finance you, move you, and help build the world around you.

And because of how market‑cap weighting works, with every dollar that flowed into a broad index fund, more money automatically went into these giants. Success fed on itself. This is a wonderful dynamic when you’re along for the ride, but it’s less wonderful when leadership eventually changes, as it always does. The flows that lifted these companies can work in reverse.

We’ve also seen how fast this can play out. In 2022, the Magnificent Seven fell by roughly half from peak to trough, and the S&P 500 dropped by about 25%5. Then we saw sharp recoveries in 2023 and 2024, and many investors quickly moved on, almost as if the drawdown had never happened. More recently, we’ve had 20–30% swings in leading stocks and almost 10% pullbacks in major indices in just a matter of weeks. If you blinked, you could have missed them. The speed of these moves and the seeming certainty of a quick recovery makes them psychologically easier to ignore, but the declines remind us that equity risk is real.

At the same time, smaller companies around the world have behaved much more in line with long‑term history. Over the last 10 to 15 years, global small‑caps have tended to deliver returns in the 10–12% range6. In other words, they did what we expected them to do. The anomaly has not been small‑caps underperforming; it has been large‑caps, especially U.S. mega‑caps, doing far better than usual. You can think of it as one part of the market sprinting while the rest jogged. The sprint can’t continue indefinitely.

Another area where I see magical thinking is around technology booms, especially AI. The world is celebrating capital expenditure (capex) right now. Hundreds of billions of dollars going into data centers gets treated as obviously good news. More infrastructure. More computing power. More capacity. Bring it on!

The money expected to be spent on data centers and related projects is larger than the combined cost of many of the biggest projects America has undertaken over the last 100 years: the Midtown Tunnel, LaGuardia Airport, the Triboro Bridge, the Manhattan Project, rural electrification, the Apollo program, and the interstate highway system7.

The sheer scale of that capex raises a natural question: what have big spending booms meant for shareholders in the past? One of my friends and academic collaborators, Sheridan Titman, wrote an influential research paper in 2003 looking at what happens to stock returns after companies ramp up their capital spending. What Titman found is that companies with very high capex growth rates have tended to underperform in the years that follow.

We now have roughly 100 years of market data to help us understand this issue from multiple angles, across different markets and time periods. Railroads changed the world. Telecom changed the world. The internet changed the world. But the companies at the center of the spending boom were not always the best stocks to own after expectations and capital spending got too high.

That does not mean AI is not important. It is tremendously important, possibly as much so as the past revolutions I just listed. It means we should be careful about assuming that the companies spending the most money will automatically produce the best investment returns.

Positioning for What Comes Next

So how am I responding in portfolios? First, by dialing down the concentration risk in the biggest, most popular names. I am not “anti‑tech,” and I’m not predicting the collapse of any specific company. But when a stock’s price already assumes years and years of flawless execution when potential competitors are in plain sight, there is little margin for error. I’d rather own some of these leaders in measured doses, rather than in their swollen market-cap weights, and pair them with a larger number of smaller, less celebrated businesses where expectations (and prices) are more reasonable.

Second, I am leaning into what many are calling the “great rotation” in markets. That means placing more emphasis on smaller and mid‑sized companies, both in the U.S. and abroad, and on value stocks—companies trading at more modest multiples with solid balance sheets and real cash flows. These businesses often live outside the headlines. They make industrial components, manage logistics networks, or provide specialized services. For example, a small or mid‑cap company that helps retrofit factories with energy‑efficient equipment may not trend on social media, but it can quietly compound value for years as firms invest in productivity and sustainability.

Third, when it comes to big themes like AI, I often prefer the enablers to the icons. Instead of trying to guess which consumer app will “win” the AI race, I’m more interested in the companies that are the "picks and shovels" behind the theme — those that supply high‑end power systems for data centers, design critical networking gear, or develop the software tools that large enterprises need to integrate AI into their operations. A boring‑sounding company that helps supermarkets use AI to reduce food waste by 10% can be a wonderful business, even if it never gets a catchy nickname.

Investing in such companies reminds me of Levi Strauss & Co.’s 1850s strategy of selling blue jeans to gold miners instead of panning for gold. Most of the miners went bust, but Levi Strauss & Co. is thriving 175 years later.

Finally, I am working hard to reset expectations.

The last decade and a half have spoiled us. We’ve gotten used to short corrections and fast rebounds, and to U.S. stocks, and especially U.S. tech giants, being the default winners.

Going forward, I expect more normal conditions: periods when markets move sideways for a while, when leadership rotates, and when patience and discipline matter more than ever. In that world, rebalancing—selling a little of what has done very well and buying some of what has lagged—can add real value over time.

In the final part of this series, I’ll turn to the backdrop behind all of this: fractured globalization, the growing strain of government debt, and the dollar’s evolving role in the global financial system. I’ll also look at how those forces shape how I think about real assets, infrastructure, commodities, gold, and international investing in a portfolio built for many possible futures.

Endnotes

1 Source: Ibbotson data courtesy of © Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated works by Roger C. Ibbotson and Rex A. Sinquefield).

2 Source: Bloomberg. Data are for the S&P 500 total return index, which includes reinvestment of dividends, through May 29, 2026.

3 Source: Bloomberg.

4 Source: Bloomberg and MSCI.

5 Source: Bloomberg.

6 Source: MSCI.

7 Sources: U.S. Department of the Treasury, Congressional Budget Office, and Brookings.

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