QuantStreet March 2026 Letter: AI Revolution

by Harry Mamaysky of QuantStreet Capital, 3/3/26

AI fatigue has taken hold of financial markets. The companies powering the AI revolution (Nvidia, Google, Microsoft) were down. The companies that are being (or might be) disrupted by AI, like software makers, were also down. Bitcoin, with no obvious connection to the AI nexus, also took a beating. Financials, while benefiting from the Trump administration's deregulatory agenda, sold off on concerns about private credit hiccups (like the Blue Owl fund redemption gate and the insolvency of MFS in the UK). The winners included utilities, energy (on the back of concerns about a US attack on Iran, which started on February 28, 2026), gold, and most things international. The dollar was flat on the month but investor preference for more non-US exposure continues unabated.

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Our own views are unchanged. We are constructive on US markets. The AI boom is in its early innings. The capabilities of these technologies are mind boggling (see discussion below), and computational resources, power, and distribution capabilities need to be built to support AI adoption, which is happening at a breakneck speed, far exceeding adoption curves of previous technologies. At the same time, the One Big Beautiful Bill Act will provide fiscal stimulus, the Trump administration deregulatory agenda will move forward, the resurgent M&A cycle will continue, and corporate America is starting from a low leverage point, so has room to add on debt to finance the AI buildout. Finally, we anticipate a continued positive impact from an accommodative Fed.

An important negative is that equity valuations are high in the US, but our view is that the market is pricing in high growth not low returns. In light of the above list of supportive factors for US markets, it would, in fact, be surprising if valuations were not high. Of course, high valuations and increasing leverage may yet prove to be a toxic mix, and other unanticipated risks may arise, but overall we believe it to be an attractive investment backdrop.

We are less sanguine on the dollar. As we wrote recently, dollar headwinds are building. Many in the world are frustrated with what they perceive to be unstable US foreign policy. The Trump administration’s messaging on Greenland was frustrating for many US allies. On top of this, the Trump administration prefers a weaker dollar, because this will improve the US trade balance: our stuff will become cheaper and the rest of the world’s stuff will become more expensive for the US consumer. The tension here, of course, is that the Trump administration also wants lower rates and thus needs lower inflation. So there is a limit to their dollar weakness policy. While it is not possible for the rest of the world to dispose of their dollar assets—and frankly I don’t think they really want to—at the margin, the demand for US securities, especially fixed income securities, will likely be diminished. This is the message from the gold market and seems consistent with the dollar slowly losing its status as the world’s only reserve currency.

Our general views, bullish on risk assets but negative on the dollar, are reflected in our portfolio’s increased international allocations (the highest since we launched) and baseline risk exposures. This allocation is supported by our qualitative views, as discussed above, as well as our systematic asset allocation process. This month, we also initiate a small allocation to Japanese stocks. You can see our historical performance here.