cvernon, Author at Marquette Associates

A Bug in the Software

Recent market dynamics in the software sector reflect a sharp shift in investor sentiment driven primarily by concerns that advances in artificial intelligence could fundamentally disrupt traditional software business models. Public software-linked equities have sold off broadly (even as many companies continue to deliver solid earnings) because investors are increasingly focused on long-term structural risks rather than near-term financial performance. Indeed, estimates for longer-term earnings growth for these businesses have started to decline despite stable or improving near-term outlooks, highlighting growing skepticism around the durability of pricing power, competitive moats, and growth trajectories in an AI-enabled environment. Since the end of October, the S&P North American Technology Software Index has fallen by roughly 30%. These concerns have now spread beyond equities into credit markets, where leveraged loan investors are rapidly reducing exposure to software-related borrowers. Many software loans that entered 2026 priced at or near par have since declined as investors reassess the sector’s credit risk profile, reflecting fears that AI-driven disruption could weaken cash flows and increase default risk for highly leveraged issuers. Specifically, the Morningstar LSTA U.S. Leveraged Loan Index has dropped by around 6% since the start of 2026.

This repricing across equity and credit markets underscores a key shift in sentiment. Software, long viewed as one of the most predictable and resilient sectors of the economy due to recurring revenue models and high margins, is now facing simultaneous multiple compression in equities and widening spreads in credit. While fundamentals remain relatively intact today, markets are increasingly discounting a wider range of potential outcomes for software-linked businesses, creating heightened volatility and a more selective environment in which investors are demanding clear evidence of AI resilience and sustainable competitive differentiation.

The Seller Becomes the Buyer

Most have traditionally viewed a successful exit for a venture-backed start-up as either an IPO or an acquisition by a larger strategic or public company. That long-standing dynamic is gradually shifting, as start-ups are now more active than ever as acquirers. Indeed, what was once a buyer landscape dominated by strategics and public corporations now increasingly includes venture-backed firms. According to PitchBook-NVCA data, VC-backed buyers accounted for more than 38% of total U.S. venture M&A activity last year, up from roughly 20% a decade ago, with 2025 marking seven consecutive years of increasing participation. Specifically, more than 387 start-ups were acquired by venture-backed companies last year, compared with 177 in 2015. Although overall exit volumes remain below 2021 peak levels, the steady rise in startup-led acquisitions reflects a structural shift toward internal consolidation within the venture ecosystem.

The drivers behind this shift are largely pragmatic, as capital remains available but far more selective. Growth equity investors are increasingly concentrated within perceived category leaders, while companies that fall slightly below that threshold face a more challenging fundraising environment. For scaling start-ups that have survived earlier rounds of capital selection, acquisitions can serve as an efficient strategic accelerant. Rather than depleting cash reserves to build adjacent features, expand geographically, or acquire customers organically, management teams can accelerate these objectives through M&A, adding revenue, product capabilities, or talent in a single transaction. At the same time, the bar for IPO readiness has risen materially in the last five years, as public investors are increasingly prioritizing profitability, operating leverage, and durable revenue growth. For venture-backed companies aiming to meet these standards, combining with a competitor or complementary platform can create scale and margin expansion more quickly than standalone execution. In some cases, consolidation represents the most rational path forward in a more disciplined capital cycle. This trend is visible at the upper end of the market as well. For instance, OpenAI completed five acquisitions across hardware design, experimentation tooling, fintech AI capabilities, and model infrastructure in 2025 alone. The fact that one of the world’s most valuable private companies is actively using M&A as a growth lever reinforces the idea that an acquisition is no longer solely a means of exit but increasingly a tool for expansion.

While it remains too early to declare a permanent transformation in venture markets, it is clear start-up-led consolidation is becoming more common and strategically meaningful. As companies remain private for longer and develop greater operational scale, their roles as acquirers may continue to expand.

The Passive Performance Podium

Performance is a key attribute of any investment strategy with a values-based or sustainability focus. As such, analyzing the 2025 returns of traditional indices and those of their ESG-integrated equivalents seemed like a worthwhile endeavor, especially given the 25th Winter Olympic Games currently taking place in Italy. The purpose of this assessment was to evaluate how ESG-oriented indices performed against traditional indices in the U.S. Large Cap, Emerging Markets, and Developed International equity spaces to determine the “passive performance medalists” of 2025.

Before evaluating returns, it is important to outline how ESG-oriented indices are constructed, given that a degree of tracking error is always to be expected from these benchmarks. According to MSCI, each ESG index seeks a risk and return profile that is similar to the broad market index it is designed to track, while also targeting improved sustainability characteristics and avoiding controversies. Of course, nuances exist across different flavors of sustainability indices. For instance, the “ESG Leaders” approach differs slightly from that of “ESG Focused” indices in that it overweights higher scoring ESG names against sector peers and utilizes additional screens. Key examples include the following:

MSCI USA Extended ESG Leaders Index: Applies exclusions related to alcohol, Arctic oil and gas production, controversial weapons, nuclear power, palm oil, thermal coal, tobacco, fossil fuel extraction, and gambling.
MSCI Emerging Markets ESG Focus Index and MSCI EAFE Extended ESG Focus Index: Both apply exclusions related to civilian firearms, controversial weapons, tobacco, thermal coal, and oil sands.

The time has now come to award the medals. In the U.S. Large Cap space, the ESG Leaders approach landed atop the podium in 2025, as overweight positions in best-in-class Communication Services companies proved fruitful last year. Within Emerging Markets, the MSCI EM ESG Focus Index took home gold with the highest absolute outperformance thanks to positive stock selection effects in sectors including Information Technology, Health Care, and Energy (where being underweight also contributed to excess returns). Finally, a photo finish determined the gold/silver outcome for traditional indices in the EAFE space. The MSCI EAFE ESG Index trailed the two traditional benchmarks due to its weapons-related exclusions and lower exposure to companies in construction and mining spaces, which hampered relative returns given Europe’s increased focus on defense and infrastructure.

The fact that passive ESG indices fared well outside of the EAFE space in 2025 serves as a reminder that funds that track these benchmarks may make sense for the following types of market participants:

Mission-aligned investors who do not see their values fully reflected in certain segments of their portfolios
Purpose-driven or traditional investors who may consider passive vehicles as placeholders before identifying a viable active manager

It is important to note that understanding the nuances of different ESG-focused products is crucial, as many involve exclusions, additional risk management levers, and screens that will create absolute and relative performance variability. Still, if a lesson can be learned from 2025, it is that investors can enjoy strong performance from passive equity strategies while also tilting toward securities with more sustainable characteristics.

Precious Metals Lose Their Luster… Perhaps

Precious metals have been going on a magnificent run in recent years. Specifically, gold moved from $1,898/ounce at the end of 2020 to $5,375/ounce on January 29 of this year, which represents a gain of 181%. During that same time, silver exhibited a more volatile but highly correlated return pattern, moving from $26/ounce to $116/ounce for a gain of 338%. Then came Friday, January 30. On that day, gold dropped more than 12%, its biggest intraday decline since the early 1980s. Silver plunged by a staggering 36%, a record intraday decline for the metal. The fall continued in February, with gold and silver falling to $4,661/ounce and $79/ounce, respectively. Markets have bounced back somewhat in recent days, with gold climbing by roughly 6% and 3% on Tuesday and Wednesday of last week, respectively. Silver advanced on those days as well. Despite this recent pop, many investors are asking the following question given the sharp decline in gold and silver: Have precious metals lost their luster?

To answer this question, it is worthwhile to first outline the reasons for the run-up in gold and silver over the last several years. A primary factor driving strong precious metal performance is global inflation and geopolitical instability (e.g., tensions between the U.S., Russia, China, and the Middle East) that has pushed investors to seek safety in more traditional stores of value. Tariffs and trade-related conflicts have exacerbated this flight to perceived safety. Additionally, developed economies continue to run significant budget shortfalls, leading investors to gold over bonds as governments continue to issue debt to fund deficits. Individual investors are not the only ones that are adding to their gold reserves, as central banks around the world have been purchasing record amounts of gold in recent years as part of a push toward tangible asset ownership. Finally, there have been tailwinds specific to silver, including a structural deficit, thinner trading markets, and its usage in AI infrastructure, data centers, electric vehicles, and solar panels.

After the rally came the fall on January 30, when the Trump administration tapped Kevin Warsh to lead the Federal Reserve. Traders viewed Warsh as the toughest inflation fighter among the finalists for the position, and his nomination increased expectations of U.S. dollar strengthening and weaker precious metals in dollar terms. The slide in precious metals may have been exacerbated by a gamma squeeze, in which dealers must sell positions as prices fall to maintain balanced portfolios.
Fast markets make commentary quickly obsolete, and it is possible that metals markets will exhibit additional volatility in the weeks ahead. This volatility, as well as potential storage costs and the speculative nature of the space, are drawbacks of precious metals investing, and investors should treat commodities like gold and silver with caution given these risks. Time will tell if gold and silver have indeed lost their luster.

K-Shaped Conundrum

Macroeconomic forecasting is challenging in the best of times and proved downright impossible in 2025, which saw high levels of geopolitical instability and policy uncertainty. Many economists were cautiously optimistic about the state of the global economy at the start of last year, only to revise growth forecasts sharply downward after President Trump’s tariff announcements in April. By summer, markets and economists alike were still largely convinced that a recession was imminent, but this anticipated downturn did not materialize. On the contrary, high-level GDP and consumer spending data for 2025 suggest stable (albeit slowing) economic growth. Despite steady headline figures, however, concerns remain surrounding potential softening of the domestic labor market and slowing real-wage growth. As illustrated by the chart above, these effects are distributed unevenly across income brackets, with wages rising by 3.8% for the highest-earning households over the last year, compared to only 0.8% for lower-earning households. Consumption for lower-income households has also declined in recent time, with a Moody’s survey estimating that the top 10% wealthiest U.S. households now account for roughly half of all consumer spending. Equity market performance has exacerbated this inequality, as wealthier individuals tend to have a larger percentage of their net worth invested in financial assets.

Economic bifurcation, often referred to as a “K-shaped economy,” explains why strong GDP growth can occur in tandem with deteriorating consumer confidence. This dynamic has also challenged policymakers, as institutions like the Federal Reserve have been tasked in recent years with both cooling inflation and preventing further labor market deterioration. Moreover, as lower-income households struggle to finance essential purchases, it is possible that future GDP growth will be contingent on wealthier households spending at current or higher rates. It follows that an event that leads to a pullback in spending (e.g., an equity market downturn) could be detrimental to overall growth. While predicting the trajectory of the economy is certainly a challenge, understanding these dynamics offers some insight into the indicators to monitor in 2026.

Pining for Evergreens

In recent years, access to traditionally illiquid private markets has expanded through the rapid growth of evergreen funds, which provide investors with more favorable subscription and liquidity terms than traditional closed-end vehicles. New evergreen fund launches notably increased from 30 in 2018 to 107 in 2025, with alternative credit strategies emerging as the primary driver of this growth (36 new fund launches last year). Many new funds have also come to market in the private equity, real estate, and infrastructure spaces, and these dynamics can be observed in the chart above. There are more than 500 active evergreen funds available to investors currently.

Broad adoption of the evergreen structure reflects growing demand for more illiquid assets across both institutional and retail investors. In addition to the advantageous terms mentioned above, many offer seasoned and diversified exposures, which can help mitigate the J-curve effect that is exhibited within private markets. Many evergreen funds also have lower investment minimums and less operational complexity relative to closed-end vehicles. All of these factors have contributed to the proliferation of evergreens detailed above. It is important to note, however, that there are drawbacks associated with evergreen fund investing, including potential liquidity mismatches and gating risk. Overall, while evergreen funds have broadened access to private markets through greater flexibility and lower barriers to entry, investors must balance these benefits against the structural liquidity and redemption risks inherent in illiquid asset classes.

Seventy-Five Horses and Two Pieces of Plastic

Anyone who has gone snowmobiling knows it can be simultaneously exhilarating and terrifying. Throttling across snow and through a forest powered by a 75-horsepower engine with two plastic skis to steer makes it hard to feel like one has complete control; 30 mph in the open air feels more like 100!

Nonetheless, operating a snowmobile is pretty straightforward: The throttle is a right-thumb button, the brake is a left-hand squeeze lever. Beyond those two controls, it’s up to the driver to effectively navigate the trail, with the critical concession that the terrain is out of anyone’s complete control. Which brings me to our 2026 market outlook.

The “throttles” for portfolios are the usual constituents: equities, below investment grade credit, and private markets. The “brakes” are investment grade fixed income, particularly Treasuries which can slow a portfolio’s losses if the market tumbles. The terrain is naturally the actual path that each of these asset classes will follow in 2026. Since 2022 the equity market ride has been mostly exhilarating, save for some of the terrifying moments like the market dip after Liberation Day. But that’s in the rearview mirror, and the focus is what is around the bend. Will the thrill continue, or should we ease up on the throttle?

Concentrating on Market Concentration

Last week, Alphabet joined NVIDIA, Microsoft and Apple as the only companies to ever reach a market capitalization of $4 trillion. The growth of these and other U.S. mega-cap technology companies has completely changed the composition of indices that measure the domestic equity market. Indeed, the weight of the top 10 constituents of the MSCI United States Index (which is comprised of large- and mid-cap stocks) sat at roughly 23% just three years ago. At the end of last year, however, that figure sat closer to 38%. As can be seen above, this concentration has resulted in a handful of stocks driving a significant share of overall index returns in recent periods. Interestingly, the theme of market concentration is not exclusive to domestic indices. For instance, companies in China, Taiwan, and South Korea have helped provide the materials required for the artificial intelligence boom, and the growth of these businesses has led to higher levels of concentration for the MSCI Emerging Markets index. The top 10 constituents now represent slightly less than one-third of this index, and TSMC, the largest producer of semiconductors in the world, notably comprises roughly 12% of the benchmark. Similar to trends within domestic markets, these top constituents had an outsized impact on the return of the MSCI Emerging Markets Index in 2025.

Interestingly, the MSCI EAFE Index, which is comprised of non-U.S. developed markets large- and mid-cap stocks, has not followed these same trends, with the weight of its top 10 constituents actually decreasing in recent years. While its largest holding is ASML, a supplier for the semiconductor industry, this benchmark is not nearly as heavily tilted towards the AI boom as domestic and emerging markets indices. For this reason, developed international markets could be a stronger source of diversification for investors moving forward.

2026 Market Preview

This video is a recording of a live webinar held January 15 by Marquette’s research team analyzing 2025 across the economy and various asset classes as well as themes we’ll be monitoring in 2026.

Our quarterly Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real assets, and private markets, with commentary by our research analysts and directors.

Featuring:
Greg Leonberger, FSA, EA, MAAA, FCA, Partner, Director of Research
Frank Valle, CFA, CAIA, Associate Director of Fixed Income
James Torgerson, Senior Research Analyst
Catherine Hillier, Senior Research Analyst
David Hernandez, CFA, Director of Traditional Manager Search
Evan Frazier, CFA, CAIA, Senior Research Analyst
Dennis Yu, Research Analyst
Amy Miller, Associate Director of Private Equity
Chad Sheaffer, CFA, CAIA, Associate Director of Private Credit

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