Message from the CIO

Insights from Harison Sidhu, Cambridge Chief Investment Officer

The past several weeks have delivered a meaningful uptick in market volatility, driven largely by rapid developments in artificial intelligence and shifting risk perceptions across several major asset classes. The catalyst has been the release of Claude Code, a product with the potential to disrupt a wide range of highly profitable software businesses.

While it’s difficult to determine whether the market is accurately assessing winners and losers at this stage, what is clear is that AI-driven capabilities are only getting stronger, and evaluating the strength of a company’s competitive moat has never been more important. We should note that we still feel strongly that in aggregate these technologies will create more business opportunities than they destroy and are likely to bring about significant productivity gains. This is desperately needed by the global economy and will not only help push stock prices higher but also aid countries with large debt servicing needs and even tame inflation.

These disruptive forces represent real risks for many existing business models, even as they create new opportunities for others. This dynamic has been especially challenging for public markets given the large weight of the technology and software sectors within major U.S. equity indices. As of February 5, 2026, the MSCI Software Index is down nearly 21% year-to-date, sharply underperforming the broader S&P 500.

Adding to the pressure, investors have become increasingly aware that large private market investment firms may hold significant exposure to the very software companies most at risk, whether through buyout strategies or private credit funds. In turn, publicly traded alternative asset managers have experienced notable share price declines, and allocators are increasingly focused on software exposure throughout their portfolios.

Crypto markets have not been immune either. Major cryptocurrencies have suffered brutal pullbacks, with Bitcoin losing nearly a third of its value in the first five weeks of this year alone. This downturn reinforces a trend we’ve been watching for some time: the rising correlation between digital assets and the technology sector. We hypothesize that many of the institutions and investors that actively purchase cryptocurrencies also tend to be overweight technology stocks in their portfolios. This relationship might undermine crypto’s perceived diversification benefits, particularly in chaotic environments, and contribute to deeper portfolio downturns during risk-off moments.

In our 2026 Market Outlook, we emphasized the importance of building more diversified, higher quality, and more defensive portfolios. Recent volatility underscores that message. Now more than ever, investors should consider expanding their opportunity set beyond U.S. large cap technology stocks, incorporating defensive and high-quality companies, international equities, smaller capitalization stocks, and healthy allocations to fixed income assets.

As always, we are here to help you navigate these shifts and assess what they mean for your portfolios. Please feel free to reach out with any questions or if you would like to discuss these developments in more detail or visit the Research Center to review more of our insights.

Week in Review

This week’s data offered a mix of momentum and moderation. Manufacturing activity improved, but labor indicators softened, and price pressures — especially in services — remained elevated.

Manufacturing: Growth with a Caveat

Business surveys opened the year on firmer footing. ISM Manufacturing returned to expansion at 52.6 (from 47.9), its first expansion in a year, led by New Orders (57.1), Production (55.9) and Backlog of Orders (51.6). Yet the survey also highlighted ongoing supply‑chain friction, with Supplier Deliveries (54.4) indicating slower lead times and customers’ inventories reported as “too low” (38.7), reinforcing a narrative of restocking demand. S&P Global’s Manufacturing Purchasing Managers’ Index (PMI) also signaled stronger output (the strongest since May 2022) but offered an important nuance: production outpaced new orders, contributing to further finished‑goods inventory accumulation — an imbalance that is difficult to sustain without clear demand reacceleration.

Employment: A Defensive Shift
The employment backdrop was less encouraging. ISM Manufacturing employment improved but remained in contraction at 48.1, suggesting firms are meeting higher activity with caution on headcount. ISM Services employment held just above breakeven at 50.3, indicating hiring is positive but fragile. Hard data echoed that cooling tone: December Job Openings and Labor Turnover Survey (JOLTS) openings fell to 6.5 million, and the job‑openings rate slipped to about 3.9%, reflecting softer labor demand into the year‑end. Weekly claims also weakened for a second week, with initial claims rising to 231,000 (week ending January 31) while continuing claims stayed low at 1.844 million. The Challenger report added to the caution, with 108,435 announced layoffs in January, the highest January total since 2009. In all, the labor market has been able to absorb the majority of the displaced workers; however, these figures point to a more defensive posture.

Inflation: Persistent Business Pressures
Inflation signals remain mixed. ISM price indexes stayed elevated (Services Prices at 66.6 and Manufacturing Prices at 59.0) pointing to ongoing cost pressure even as the labor market cools. Meanwhile, the University of Michigan’s preliminary February survey showed sentiment edging up to 57.3, with one‑year inflation expectations falling to 3.5% but long‑run expectations rising to 3.4%, a reminder that inflation psychology has not fully re‑anchored. If labor demand continues to cool, it could help temper inflation over time, but survey evidence suggests firms are still managing higher costs.

The upcoming week presents a concentrated macro schedule as markets navigate a backlog of delayed reports following the recent federal government shutdown. This compressed data cycle serves as a critical inflection point, either validating recent manufacturing momentum or confirming the “defensive shift” observed in late-January labor indicators.

Labor: Testing the Defensive Posture

After weaker signals in job openings and a rise in announced layoffs, the rescheduled January payroll report becomes a critical audit of hiring momentum. Nonfarm Payrolls, the unemployment rate, and broader underemployment (U‑6) will help determine whether the current “fragile but functioning” hiring environment is slipping into a more persistent labor market slack. A higher underemployment rate or softer participation would suggest displaced workers are taking longer to find new roles, reinforcing the defensive tone seen in recent indicators.

Consumption and Inventories: The Restocking Audit

The consumer narrative will be clarified through core retail sales, while business inventories will provide a direct follow‑through to the “restocking” theme embedded in recent manufacturing surveys. Together, these releases should help separate a true demand rebound from a production-led inventory build. Housing data later in the week adds a rates-sensitive check on big-ticket household activity and whether elevated financing costs are still constraining turnover.

Inflation: Anchoring Price Psychology

The week also brings a key intersection of price stability and rates. Treasury auctions will gauge appetite for duration ahead of the Consumer Price Index (CPI) release. With business price indexes still elevated even as labor cools, CPI will shape whether inflation expectations continue to drift lower in the near term, or whether persistent cost pressures remain a structural risk to the soft-landing narrative.