Q1 2026 Review: Is it Time to Worry?

There is a lot to worry about. War in Iran, artificial intelligence, inflation, high stock valuations, and the potential liquidity crisis in “alternative” investments. It’s enough to keep anybody up at night (and if you are up, give us a call, because we are probably up taking care of one of our kids!).

Yet the first quarter was a reminder of why we manage money the way we do. Despite the broader sell-off, many of our portfolios finished in positive territory. There are two reasons for this.

The first is diversification. In a market highly concentrated in a handful of large tech companies, we believe owning a broader basket of businesses is less risky. We did not abandon oil and gas despite the entire sector making up only 3.5% of the S&P 500 (about half the size of Microsoft). Natural resources remain undefeated as a hedge against inflation and global turmoil.

The second is investment discipline. We stayed grounded in our process and avoided chasing performance. We didn’t abandon smaller companies or consumer businesses, and focused on strong balance sheets, good cash flow, and out-of-favor opportunities. As the market rotated away from AI, many of these positions began to recover.

Still, we worry just like everyone else.

Geopolitical Risks & Inflation

War is inherently unpredictable and dangerous. A simple misunderstanding can escalate beyond the point of no return. Hedge fund investor Ray Dalio has argued that we are already in a form of world war, pointing to both “shooting wars” and ongoing economic, technological, and geopolitical conflicts.

While higher energy prices may prove short-lived if tensions ease, we are now approaching five years of inflation above the Federal Reserve’s 2% target. At some point, this becomes a structural headwind to economic growth.

Artificial Intelligence

Much of recent economic growth was driven by massive investment in artificial intelligence infrastructure. As AI works its way through the economy, it will create second and third order effects that are difficult to predict. Entire industries may be disrupted, while others may benefit in ways that are not yet obvious. As a society, we’ll be forced to grapple with the big questions about work and job displacement, addiction and reality, and who gets to set the rules. This makes it increasingly difficult to distinguish between durable long-term winners and short-term momentum.

Valuations & Liquidity

This is unfolding against a backdrop of elevated valuations, with above-average Price to Earnings multiples and the Buffett Indicator (total stock market value / GDP) near all-time highs.

The environment has pushed many investors toward “alternative assets”, primarily private equity and credit, which in many ways resemble traditional stocks and bonds, but with more leverage and less transparency. Today, private equity firms own ~13,000 companies, worth upwards of four trillion dollars. In a market near all-time highs, you would expect many of these companies to go public. The fact that they haven’t raises more than a few eyebrows.  

At the same time, we are approaching some of the largest IPOs ever, including Elon Musk’s SpaceX, OpenAI (ChatGPT), and Anthropic (Claude). Expectations are enormous, with valuations reaching into the trillions, despite limited or negative earnings collectively.  

Meanwhile, there’s another few trillion in loans financing these private equity and venture backed companies through private credit. Taken together, we wonder how much of today’s market is built on assumptions yet to be tested.    

Is it Time to Worry?

So yes, there’s a lot to worry about, but that’s our job. The worrying helps us navigate the minefield. We may miss some upside along the way, but more often it protects clients when disruption inevitably occurs.

We mentioned two of our three guiding principles at the beginning of this letter: 1) Diversification is the key to successful long-term investing, and 2) Invest in companies you can own for generations, not days. But it’s the third principle that may be the most important: 3) We believe in asset allocation, not market timing.

That’s why, despite our concerns, you won’t see us running for the hills! There’s no urge to blindly buy every dip or sell when things get uncomfortable. Instead, we focus on long-term opportunities, knowing the future is inherently unpredictable. With the right asset allocation, including short-term bonds and cash where appropriate, clients are positioned to remain invested to achieve their goals.

Right now, some of those opportunities are emerging in software, as we continue trimming our semiconductor related exposure. It’s not easy to sell something that continues to make money, but we believe it’s the smart long-term approach when spending inevitably slows.  

At the same time, software is evolving rapidly and we expect certain companies to use these tools to meaningfully improve their products. We also favor hard assets like real estate, cell phone towers, and pipelines which will not be replaced by AI and generate durable cash flow. Even companies like Netflix and Uber, which we wouldn’t have imagined owning years ago, are becoming attractive at more reasonable valuations.

Ultimately, our job isn’t to predict what comes next, but to make sure that our clients are prepared for whatever does. This quarter was a timely reminder of exactly that.

The Compass Team

_{Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.}