Portfolio construction

pAIn or gAIn? A road map for long-tailed investment cycles

March 03, 2026 - 4 min

Portfolio Consultant – Natixis Investment Managers Solutions

AI loves me? AI loves me not? Investors could be forgiven for asking such questions in early 2026, with the U.S. large-cap space under pressure after years of AI-driven gains. Comparisons to the early 2000s abound, and understandably so. Though the market setup and nature of the companies at the top of the index are very different today, AI represents a secular trend, a long-tailed investment cycle probably most similar to the impact of the internet during our recent investment lifetimes. While it is impossible to predict all the outcomes, it may be helpful to take a step back and understand the price action in the context of the typical phases of such cycles.

Phase I: Beta – “Get me in”

This is the phase where an idea begins to gain traction as an actual investable thesis. Excitement builds around the potential applications, and capital begins to pour in. During this period, the thesis is really an asset-class story instead of a single name story. The play is to buy the space and get rewarded as capital floods in. To put this in the context of the current cycle – remember when all you had to do was announce you’re spending on AI-related capital expenditures (CapEx), and your stock price went up 5% instantly? Simply indicating that you are allocating resources to the theme is enough to get rewarded during the beta phase. We are squarely past this phase of the AI investment cycle. Oh well, it was fun while it lasted.

Phase II: Broadening

This is the phase where questions start to get asked, revenue projections are challenged, valuations are scrutinized, and earnings are watched like a hawk. Is the ROI showing up, or is good money being wasted on ideas that never materialize? The challenge during this phase is that there are no easy answers. The market is seeking clarity, and there is simply none to be had. This leads to two results: Volatility generally rises as the previous “winners” begin to trade sideways, and the market begins to seek secondary beneficiaries – industries or businesses that have a tie in to the theme but not necessarily with the “ground zero” exposure of those areas that really appreciated during the beta phase. Ideas like “picks and shovels,” buying data centers, buying hyperscaler supply chain companies, buying water providers, buying construction plays – all of these would fall in this category. I would argue this is exactly where we are right now.

The market is differentiating winners and losers

Correlations between the Mag 7 names have fallen from ~0.55–0.60 to ~0.20–0.30. To us, this is an indication that the market has moved past the “beta” phase and is now in the “broadening” phase.

Phase III – Best of breed

Eventually, this dynamic will morph into one of true clarity. The market will begin to understand which operators in every industry are truly finding measurable ways to achieve higher margins and greater return on invested capital. Those names will begin to distance themselves from the others in their industry in terms of their price appreciation. But this will be more durable and less volatile because you will ultimately have real earnings productivity increases driving the appreciation. It will take the market a significant amount of time to get here, and this will not happen at the same time for every industry but will more likely hit different industries on a staggered basis. This is really an alpha story rather than a beta story at this phase. It is the market figuring out and rewarding the individual names that have truly separated themselves from the pack given the leverage they have achieved through the new technology.

How can investors navigate the cycle?

The “beta” phase is easy. Buy the space. Ride the index. Everyone’s a genius during this phase. This is where passive management dominates.

Gain: Owning the space.

Pain: Waiting too long and potentially seeing the price continue to get away from you. The “broadening” phase is where it gets challenging. Not so easy to just own everything when half the names are going up and half the names are going down. To the extent that you may be tactical in your portfolio, this is a period where shifting asset allocation into some of the areas capturing flows at the margin can make a lot of sense as the narrative can dominate fundamental earnings data. We are looking at areas like small cap and mid cap, some areas of cyclical value, and some international exposures as particularly attractive through this phase. This is where you likely begin to see the handoff from owning the index being the dominant strategy to seeing active management begin to outperform.

Gain: Capturing some of this rotation into the “second order” beneficiaries of the theme.

Pain: Staying concentrated too long in the initial winners and giving back some of the beta gains. The “best of breed” phase is where active managers would truly shine. Those who are doing the deep work of understanding which businesses are building true competitive advantages through AI are the ones who are likely to be most successful as the market shifts to this phase. It will take the market quite some time to figure out who these names are, but those who were there early stand to be richly rewarded for choosing the winners.

Gain: Discerning single-name selection leading to outsized returns.

Pain: Remaining too “broadly allocated” and owning the relative losers as well as the winners.

Past performance is no guarantee of future results.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Investors should fully understand the risks associated with any investment prior to investing.

Diversification does not guarantee a profit or protect against a loss.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers or any of its affiliates. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

CFA^® and Chartered Financial Analyst^® are registered trademarks owned by the CFA Institute.

The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft, and Nvidia.

Alpha is a measure of the difference between a portfolio's actual returns and its expected performance, given its level of systematic market risk. A positive alpha indicates outperformance and negative alpha indicates underperformance relative to the portfolio's level of systematic risk.

Return on investment (ROI) is a performance measure used to evaluate the efficiency or profitability of an investment.

Beta measures the volatility of a security or a portfolio in comparison to the market as a whole.

NIM-02242026-nav31o3s