January 2026 Monthly Income Report

By James St. Aubin, CIO of Ocean Park Asset Management

Key takeaways:

• The valuations of leading AI stocks assume perfect execution by those companies, but there are substantial risks, including those that the companies may not have control over.
• Major stock index weightings are dramatically skewed toward a handful of leading AI stocks, and that can lead to concentration risk in index-driven or index-aware portfolios.
• The market’s fixation on AI has led it to ignore looming risks related to the Federal Reserve, the economy and policy, adding vulnerability to recent market gains.

In Greek mythology, Icarus flew too close to the sun on wings of feathers and wax, ignoring his father’s warnings about the dangers of overconfidence. The story endures as a cautionary tale about the perils of hubris. Today’s equity markets, buoyed by enthusiasm for artificial intelligence, may be writing their own version of this ancient narrative. The technology is undoubtedly transformative, but valuations for the mega-cap AI leaders have soared to levels that leave precious little room for disappointment. As 2026 unfolds, investors will discover whether the market’s exuberance is justified or whether the wax is beginning to melt.

AI is real, but so is the bar

There is no disputing that AI represents a genuine technological breakthrough. The productivity gains promised by generative AI and large language models have captured the imagination of Wall Street. Capital expenditure commitments from the largest technology companies have reached staggering levels as firms race to build the data center infrastructure necessary to train and deploy AI systems at scale.

Yet the market appears to have already discounted near-perfect execution. The so-called Magnificent Seven technology stocks trade at valuations that assume not only continued dominance but also flawless monetization of AI investments. The forward price-to-earnings ratio for the largest AI beneficiaries sits 40% above the rest of the US large-cap market. This is where the curse of high expectations takes hold. When perfection is already priced in, even modest disappointments can trigger outsized reactions.

As the infrastructure buildout cycle matures, investors will begin to reconcile expectations with reality. The promise must give way to proof. After several years of heavy investment in infrastructure, AI adoption rates by enterprise customers will ultimately determine if the hype was justified.

And even if demand meets or exceeds expectations, power supply constraints present an additional wild card. The energy demands of AI data centers are immense, and grid capacity in key regions may prove inadequate. Neither continued enterprise adoption nor adequate power supply should be taken for granted, yet current valuations seem to treat both as foregone conclusions.

Concentration: The risk hiding in plain sight

The dominance of a handful of AI-related stocks has reshaped the composition of the U.S. equity market. The ten largest-cap companies now account for a share of the S&P 500 Index that exceeds levels seen during the dot-com bubble. This concentration creates a structural challenge for portfolio managers. Many are compelled to own these names regardless of their conviction, simply because the benchmark weighting makes underperformance too painful to bear. The result is a crowded trade supported by a common narrative.

Such uniformity of positioning creates asymmetric risk. When investors share the same thesis and the same holdings, exits become congested if sentiment shifts. The downside potential in a crowded trade far exceeds what traditional risk models might suggest. History offers abundant examples of market darlings that stumbled after extended periods of outperformance, from the Nifty Fifty of the 1970s to the technology leaders of the late 1990s.

Source: Bloomberg, Apollo Global Management Chief Economist

Nothing else matters

The gravitational pull of the AI narrative has altered how investors process information. Headlines that might have shaken confidence in prior cycles now bounce harmlessly off the market’s enthusiasm. Political interference with Federal Reserve independence, once considered a cardinal sin of economic policy, has generated only fleeting concern. A weakening labor market, traditionally a leading indicator of recession, has been met with shoulder shrugs. Proposals for government price-setting on credit card interest rates, which would typically alarm free-market investors, have barely registered. Fiscal deficits and debt that continue to swell have failed to spark the vigilance that might have emerged in earlier eras.

This desensitization reflects a market increasingly myopic in its focus on a single theme. Investors have adopted a collective posture that dismisses any development unrelated to AI as irrelevant noise. Once again, we’re reminded of the late 1990s, when technology stocks seemed immune to traditional valuation concerns until, suddenly, they were not. When markets become convinced that nothing else matters, they often discover too late that everything still does.

Respecting the unknowable

This commentary is not intended as an apocalyptic market call. The objective is simply to raise awareness of the full range of potential outcomes at a time when valuations appear to reflect only the most favorable scenarios. Markets have a well-documented tendency to get ahead of themselves, and current prices do not suggest a healthy respect for the variables that remain unknowable. With that said, expectations can very well be met or even exceeded, which is why we acknowledge that favorable scenarios are not off the table.

Within this range of outcomes, investors should be prepared for the portfolio implications of a potential resetting of the market’s expectations. One step investors can take is to explore whether their portfolios have sufficient risk management.

Icarus, after all, was not wrong to want to fly. His mistake was forgetting that even the most magnificent wings have their limits.

Interested in more market insights? Check out Ocean Park’s 2025 Year-End Webcast

About James St. Aubin

Chief Investment Officer (CIO)James St. Aubin, CFA®, CAIA®, is Chief Investment Officer for Ocean Park Asset Management. He has oversight of all Investment Management department activities, in collaboration with Co-founders David Wright and Kenneth Sleeper. An experienced investment management executive, his career of more than 20 years includes leadership roles in asset allocation, manager research and portfolio construction. James earned a Bachelor of Science in Finance from DePaul University and is a CFA® and CAIA® Charterholder.

RISKS AND DISCLOSURES:

These materials may not be copied, altered, or redistributed without the prior written consent of Ocean Park Asset Management, LLC. This information is for educational purposes and is not intended to provide, and should not be relied upon for accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation.

Unless otherwise noted or sourced within, the statements herein are the opinion of the author. The statements have been made based on publicly available information and proprietary research but remain the opinion of the author unless noted otherwise. We do not guarantee the accuracy or completeness of the information provided in this document. All statements and expressions herein are subject to change without notice. Any projections, market/economic outlooks or estimates herein are forward-looking statements based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the statements made herein. Except where otherwise indicated, the information and statements provided herein are based on matters as they exist as of the date of preparation and not as of any future date, and we are under no obligation to correct, update or revise the or revise the information in this document or to otherwise provide any additional materials.

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