In our Q1 2026 Commentary, we address the main drivers behind market performance and macroeconomic developments, focusing on four key questions that reflect the evolving investment landscape.
1. How is the AI Narrative Evolving?
AI headlines created notable areas of weakness this quarter. Concerns that easy-to-use AI coding tools would doom the business model for Software-as-a-Service (Saas) companies caused what is being called the SaaSpocalypse.
2. Has the Magnificent 7 Lost Its Shine?
All Magnificent 7 stocks declined in the first quarter and their performance had an outsized impact on overall index returns given their substantial weights. Modest pullbacks among such heavily weighted names can meaningfully drag on index performance—underscoring our long‑standing concerns around concentration in market‑cap‑weighted strategies.
3. Did All Small Caps Outperform This Quarter?
Small caps outperformed large caps this quarter – the Russell 2000 Index returned 0.89% versus the S&P 500, which fell 4.33%. The solid performance of small-cap stocks that began last year on hopes of lower interest rates continued, although choked oil supplies pushed inflation forecasts higher, likely delaying rate cuts.
4. How Are We Thinking About Software Stocks?
Historically, software companies have been central to KAR’s relative outperformance, with high returns on capital, earnings stability due to their recurring revenue, and low capital intensity. However, there is a risk that generative AI will erode some of these competitive pillars. This requires us to evaluate each of our software holdings as dispassionately as possible to determine which companies might be vulnerable.
You can explore these themes further in Episode 308 of our stock market podcast, Kaynecast.
