How to stay invested – with safety gear

AFTER three consecutive years of double-digit gains for US equities till 2025, the first half of 2026 calls for investors to stay invested but to put on some safety gear. In short, they should wear their “PPE”, watch their “CCC” and keep their “FUR” on.

As we see it, there are two forms of PPE: On the factory floor, PPE means personal protective equipment which reduces the risk of injury. In markets, PPE, which stands for policy, positioning and earnings, serve a similar purpose – enabling participation while buffering against shocks.

Policy looks steady enough to avoid a policy-induced downturn. Positioning is stretched, so the task is to rotate, not retreat. Earnings remain healthy, though dispersion is widening as artificial intelligence (AI) disruption separates the wheat from the chaff.

In the long term, CCC or country-centred capitalism, a regime characterised by national security priorities and self-reliance, favours national champions and real/hard assets.

Finally, across all regimes, investors should keep their FUR on: stay Flexible, prepare for Uncertainty, and build Resilience.

Policy, positioning and earnings

The US Federal Reserve’s projections still point to only modest policy adjustments in 2026, rather than a new tightening cycle.

Analysis from early February reinforces our stance that the Fed may keep the rates steady for now while disinflation continues. This backdrop lowers the probability of a policy misstep that could trigger a bear market.

If inflation picks up and markets price in the possibility of a surprise rate hike, we expect a moderate correction of around 10 per cent, instead of a deeper 20 per cent slide.

This outlook is supported by corporate profit trends and subdued indicators of financial stress, but remains conditional upon upcoming inflation and labour market data.

On positioning, index concentration remains elevated, with the top 10 stocks accounting for more than 40 per cent of the S&P 500 by end 2025 – well above historical norms – raising crowding risks.

While market breadth is showing signs of improvement, leadership remains narrow.

A practical response would be to maintain portfolio hygiene: reduce exposure to crowded mega-caps, rebalance towards equal-weight benchmarks, and add quality cyclicals with improving earnings and reasonable valuations.

Investors should also consider a barbell strategy, holding both long-term growth compounders and value stocks with strong free-cash flow, to participate in both growth and value segments.

This is not about abandoning AI leaders; it is about reducing dependency on a handful of names and participating more broadly in the market’s underlying earnings base. In doing so, your portfolio is not hostage to a narrow group of stocks.

On earnings, most companies have reported their Q4 2025 results. Blended S&P 500 earnings growth is running in the low teens, supported by healthy beat rates. However, valuations sit above five and 10-year averages.

While the overall picture is constructive, the distribution in performance matters more, driven by AI’s influence in reshaping software economics and widening performance dispersion.

Platform-based incumbents with data moats, sticky usage and outcome-based pricing are well-positioned to defend margins.

In contrast, old-school legacy “seat-based models”, people-intensive workflows and generic tools with low switching costs are likely to face more pressure.

For investors, the implication is clear: favour platforms over point solutions and prioritise cash-generative software over “seat-count stories”. However, we expect the valuation gaps within technology to widen as the shake out could last a bit longer.

Country-centered capitalism: from invisible hand to visible fist

The days when governments allow capitalist forces to shape markets are fading. Industrial policy and national security priorities have become enduring features of today’s investment landscape.

In the US, fiscal projections point to rising debt levels. While tariffs are supporting near-term revenues, it will likely add incremental inflation in the next few years.

This policy mix implies that economies could run “hotter for longer”, and offers structurally lighter regulatory pressure for strategically important sectors such as semiconductors, defence, energy infrastructure, healthcare and critical compute.

Portfolios should reflect this regime: allocate to national champions with clear policy tailwinds and prioritise balance sheet strength in capital-intensive beneficiaries of reshoring and energy security.

Gold and left-tail risk

Persistent fiscal deficits, activist policy and reserve diversification have underpinned gold’s record highs in 2026.

While price gains may moderate, the floor is likely higher, supported by robust central banks’ demand and investors seeking a portfolio hedge.

A measured allocation remains warranted. Gold’s low correlation to risk assets and its role as a policy hedge remain valuable, amid elevated fiscal and geopolitical uncertainty.

Though AI is powering the current market cycle, it also introduces low-probability and high-impact risks.

A major accident, misuse case or systemic failure could prompt sudden and stringent regulation. Scholars have proposed “algorithmic preparedness” frameworks to address systemic AI risks – rules that would lift regulatory burdens quickly if triggered.

In this regard, investors should insure against the tail risks by diversifying AI exposures and shifting from “intangible to tangible assets”, rather than exiting the segment entirely.

While quality cybersecurity names are a structural beneficiary of regulatory scrutiny, AI disruption will put pressure on valuations and increase risk premiums in the near-term.

Principles for an all-weather framework

* Stay flexible. In today’s context, we see prudence in rebalancing from crowded mega-caps into equal-weight beta, quality cyclicals and undervalued compounders. Be ready to trim into strength and add on weakness when spreads between market cap-weight and equal-weight widen.

* Prepare for uncertainty. Hold some cash, maintain downside hedges where appropriate and keep a measured gold allocation. We see AI-infrastructure names serving as disruption insurance because hyperscaler spending is structurally resilient rather than cyclical.

* Build resilience. Prioritise companies with pricing power, data moats and high switching costs. Within the current software shake out, focus on mission-critical platforms and avoid over-reliance on seat-based billing models vulnerable to automation and usage-based repricing.

Safety over swagger

A benign policy backdrop reduces the case for panic. Stretched positioning demands rotation. Solid earnings justify staying invested – but with resilience at the core.

The playbook for the first half of 2026 is straightforward: rebalance rather than de-risk, emphasise platform quality and insure the tail risks. It is the path to staying moderately risk-on while building a portfolio that compounds through cycles.

The writer is head of investment strategy, UOB Private Bank