Manage Your Risk, but Look for Opportunities

Question: I just watched AMG’s Economic Outlook webinar. Now what do I do?

Answer: The geopolitical backdrop appears unstable. The job market shows signs of weakness. Interest rates remain a question mark, and a significant portion of the S&P 500 might be in bubble territory.

Still, the economy remains relatively solid, and the market delivered strong returns last year. So how should we read these tea leaves? Should we hide in the bomb shelter, or double down on AI and technology stocks?

If we step back and revisit AMG’s research, the situation, while uncertain, appears less alarming than some headlines suggest. Even with elevated economic uncertainty, the outlook is relatively benign. The likely economic scenario for next year is an economic slowdown, not a recession, followed by a return to reasonable, albeit slower, growth.

While the “magnificent seven” tech stocks appear overvalued, the rest of the market does not and continues to offer opportunities for solid returns. In other words, while risk and uncertainty may be stronger themes in 2026, opportunity remains.

However, opportunity does not come without exposure to risk. The best approach begins by managing that risk thoughtfully. Even with lower interest rates, there are still reasonable returns available in fixed income for the appropriate portion of a portfolio. Securing what you need for a rainy day should always come first.

That said, the remainder of the portfolio should be well diversified, with the understanding that uncertainty works in both directions. Just as assets we favor can disappoint, returns can also emerge from unexpected places. Several areas continue to stand out:

• Foreign equities remain attractive, as ongoing pressure on the U.S. dollar favors assets denominated in other currencies.
• U.S. small- and mid-cap stocks were largely left out of the AI boom and now trade at attractive valuations.
• Natural resources are likely to grow in importance as countries seek to secure access to energy, basic materials, and rare-earth minerals.

And yes, even the seemingly overvalued U.S. large-cap market still deserves an allocation. Outside of the magnificent seven, valuations are generally reasonable, and while the big tech stocks appear to be in bubble territory, that expansion could persist for several years. The key is to take profits along the way and keep allocations modest.