Today’s equity market is increasingly being driven by narratives rather than changes in underlying business fundamentals, creating a volatile and fickle market. On any particular day, entire groups of companies are being sold due to a new AI disruption headline as industries are sorted into winners and losers. The speed at which new AI use cases are being broadcast, combined with an often broad interpretation of how disruptive it will be, is driving sharp swings, even in large, closely followed companies.
Ultimately, these moves are often disconnected from reality. As investors, our goal is to distinguish between what is simply “narrative risk” (headlines and sentiment that move prices) versus “fundamental risk” (a structural impairment to a company’s business model). With this in mind, the market is currently offering a fantastic opportunity as headline-driven weakness in perceived “AI losers” has created rare opportunities to buy high quality, mission critical businesses at attractive valuations.
It’s well understood that AI is a transformative technology, but it's also important to note a familiar pattern of past technological and industrial revolutions: a frenzied allocation of capital, several ambitious promises, and a market that prices in the payoffs years before they arrive. Recent prior hype cycles (such as the internet, 3D printing, autonomous driving, virtual reality, and others) delivered real change, but on longer timelines than investors expected. In the meantime, markets are extrapolating record earnings and rapid technological progress, creating vulnerability if confidence breaks. The phrase, “this time is different,” is among the most dangerous for investors because timing matters almost as much as the direction of technology.
A key debate in the market is whether AI structurally undermines incumbent software. Although certain lower-end software may be disrupted as AI tools reduce the cost of building basic applications, we can’t ascribe to the “software is dead” thesis. Incumbent, large enterprise platforms, such as ServiceNow and Salesforce, are difficult to displace as they are deeply embedded in customer processes and integrated across complex IT environments. AI also depends on access to high quality data, and incumbents often control secure systems of proprietary data, such as sales pipelines and financial transactions.
AI is also more of an opportunity than a threat for software companies. It lowers the cost of developing and maintaining software while also creating a new stream of revenue as customers race to implement AI into their daily work processes. Incumbents will always have the advantage: the key is to understand this and not miss out on the opportunity. For example, most people know that Kodak was disrupted by the digital camera. But what is often missed is that it was Kodak themselves who invented the first digital camera back in 1975. Since management viewed the invention as a threat to their core film business, it was shelved for many years. Meanwhile, the company watched from the sideline as competitors slowly chipped away at what was once considered an almost impenetrable industry.
To complicate matters further, the recent joint US-Israeli campaign, resulting in the assassination of Iran’s Supreme Leader Ali Khamenei and several high-ranking officials, has caused a shock to the markets. Iran’s subsequent retaliation included the closure of the Strait of Hormuz, affecting ~25% of the global seaborne oil trade, and triggered a significant global energy supply disruption. By late March, Brent Crude had risen more than 40% a barrel, causing concerns of possible stagflation (slow growth coupled with high inflation).
However, even in an environment such as this, maintaining a disciplined, long-term investment posture remains the most prudent strategy. Historical precedents show that markets often over-correct before stabilizing as supply chains adjust, and alternative energy sources gradually help alleviate constraints. While the near-term outlook remains uncertain, it’s crucial to remain invested. These periods of dislocation are typically followed by recovery, once the trajectory of the conflict becomes clearer and conditions begin to stabilize. As usual, we will continue to remain disciplined in our investment approach, with a focus on long-term cash flows, skepticism toward narrative extremes, and readiness to act when volatility creates a temporary gap between price and fundamental value. History shows that while periods of heightened narratives and geopolitical tension can feel unsettling, they have often created some of the most compelling opportunities for long-term investors.