Global equity markets started 2026 on a generally positive note. However, the gap between market prices and fundamentals has grown considerably. The S&P 500 is trading at about 22.4 times forward earnings, a level last seen in late 2020, while technology, media, and telecom stocks recently reached 27.9 times forward earnings, surpassing 2021 highs.
In February, the MSCI World Index rose only 0.8%, with European and Asian markets outperforming as US large-cap tech stocks sank into the red. Narrow market leadership and increasing sectoral divergence are behind the US’s underperformance, with narratives driving valuations rather than actual fundamentals.
For value investors, this environment is not, on its own, a cause for alarm but calls for discipline. When markets focus more on stories than earnings, the importance of the margin of safety that underpins long-term wealth increases rather than decreases. The most resilient businesses are those that generate steady free cash flow, maintain conservative balance sheets, and allocate capital prudently. In a late-cycle phase characterized by high valuations and rising geopolitical risks, these qualities usually serve investors well.
Interest Rates and The Price of Capital
Central bank policy remains a key factor in asset pricing. The Bank of Canada held its policy rate at 2.25%. While inflation has fallen in some parts of Europe, policymakers worldwide are still cautious about easing too quickly. The era of near-zero interest rates, which drove valuations across nearly all asset classes, has come to an end. Capital now costs more than it did during the low-interest rate environment, altering the financial calculations for companies.
Higher discount rates have two clear implications for investors. First, long-duration assets, especially high-growth technology companies that rely heavily on future earnings projections, become very sensitive to valuation compression. Second, companies with strong balance sheets, steady cash flows, and low refinancing risk become structurally more attractive. The best-positioned companies in this environment are those that do not need cheap money to survive because they generate their own.
Technology and AI: Price Versus Value
Artificial intelligence remains the leading investment story in global markets, and the business transformation it promises could very well be real. However, the amount of capital needed to pursue it is a concern. Technology companies are investing hundreds of billions of dollars into data centres, semiconductor capacity, and AI infrastructure, with projected sector-wide capital spending exceeding $500 billion in 2026. History reminds us of earlier periods, like the dot-com bubble, when technological revolutions wiped out investors’ capital before they began generating profits.
The key questions for value investors are not about whether AI will change the world. They are about return on invested capital, margin sustainability as competition intensifies, and whether investors are extrapolating near-term growth far beyond what the fundamentals can support. TMT multiples surpassing 2021 highs suggest that, in some cases, they are. The rotation now underway, away from pure infrastructure providers and toward companies with clearer evidence of revenue monetization, reflects the market beginning to ask those same questions. Periods of technological enthusiasm often end with valuation corrections that create genuine opportunities, so it requires patience and preparation to capture the sector’s growth potential without overpaying.
Identifying the Consumer Staples that Remain Defensive, Not Expensive
Consumer staples have long served as the defensive cornerstone of cautious portfolios, and in relative terms, they have held up reasonably well. The S&P/TSX Capped Consumer Staples Index returned 4.87% year-to-date as of March 2026. But even defensive stock valuations deserve scrutiny. A high-quality business purchased at too high a price is still a poor investment.
Input cost pressures from higher commodity and energy prices have squeezed margins across parts of the sector. Meanwhile, investors crowding into perceived safety have seen some valuations reach levels that price in perpetual stability. However, consumer demand shifts and inflationary shocks have a habit of disrupting the sector’s investment case. The staples businesses worth holding are those with genuine pricing power, resilient margins, and the discipline to deploy cash flow via dividends and buybacks rather than overpriced acquisitions.
Commodity Investment Case Comes Under Geopolitical Pressure
Commodities have been among the strongest-performing asset classes in early 2026. Years of underinvestment in capital have created supply-side constraints that support long-term commodity prices. However, the attacks on Iran risk disrupting this favourable investment case.
On February 28, 2026, coordinated US-Israeli military action against Iranian nuclear and military infrastructure triggered an immediate and sharp market reaction. Brent crude, which had been trading around $70 per barrel, surged 13% to 17% over a few days, surpassing $85 per barrel. Analysts warn that a prolonged disruption to the Strait of Hormuz, the maritime channel through which approximately 20% of global seaborne oil and gas passes, could push prices toward $110 per barrel. Brent crude oil futures surged over 3% to reach $103 per barrel on Tuesday. This represents a more than 40% increase in oil prices since the conflict began.
Gold rallied strongly as investors sought safe-haven assets. Treasury yields declined as capital moved out of equities and into government bonds.
The potential energy shock risks reawakening inflationary pressures that central banks had only recently brought under control. Revised forecasts suggest the conflict could add 0.5 to 0.8 percentage points to global inflation, reducing consumer purchasing power and, critically, complicating the path toward interest rate cuts. Some central banks that were expected to ease in the second half of 2026 may now be forced to hold, or in extreme scenarios, consider further tightening. The risks of a stagflationary episode, characterized by rising prices alongside slowing growth, have increased.
Avoiding Concentration Risk and Finding Overlooked Opportunities
A defining feature of recent global equity markets has been the extreme concentration of the stock market’s gains. The 10 largest S&P 500 companies now make up about 40% of the index’s total value. When index performance is driven by just a few mega-cap technology firms, passive investors end up with large exposures to the most expensive stocks in the market, which is exactly the opposite of what value investing requires.
Concentration also presents opportunities. When capital primarily flows into popular sectors, it tends to withdraw from other areas. Industries that are out of favour, with strong fundamentals but lacking a compelling investment story, trade at valuations that reflect being overlooked rather than an unattractive business case. Some of the best long-term market returns have come from investors willing to look where others are afraid to go.
Risks, Opportunities, and the Discipline of Patience
The risks in 2026 have significantly risen with the start of hostilities in the Middle East. Geopolitical escalation, ongoing inflation pressures from energy shocks, the potential for earnings setbacks in highly valued sectors, and the constant risk of central bank policy mistakes are all major concerns. Trade uncertainty adds additional complexity to the risk landscape.
But it’s worth remembering that volatility and risk are not the same thing. Volatility causes temporary price dislocations, while risk raises the odds of permanent capital loss. The businesses most likely to protect against the latter and grow capital through the former are those with durable cash flows, strong balance sheets, genuine pricing power, and management teams that allocate capital wisely. These time-honoured characteristics do not guarantee short-term outperformance, but they do offer resilience across economic cycles.
During times of increased uncertainty, such as those caused by the Iran conflict, investors tend to shorten their time horizons and become more fearful. For investors willing to look beyond short-term noise, these periods often present the best opportunities to invest in quality companies. In markets that favour certain sectors and stocks, patience and discipline, even if that feels dull, remain the most reliable ways to avoid lasting capital loss and grow wealth over time.
Garnet O. Powell, MBA, CFA, is the President & CEO of Allvista Investment Management Inc., a firm that manages investment portfolios on behalf of individuals, corporations, and trusts to help them reach their investment goals. He has more than 25 years of experience in the financial markets and investing. He is also the Editor-in-Chief of the Canadian Wealth Advisors Network (CWAN) magazine. He can be reached at gpowell@allvista.ca