'A lot of investors a very guilty of cutting their flowers and watering their weeds': Larson

Key Concepts

• Sector Rotation: The shift of investment capital from one industry sector to another, driven by changing economic conditions and investor sentiment.
• MAG 7: The seven largest US technology companies (typically considered Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla, and Meta (Facebook)).
• VIX (Volatility Index): A real-time market index representing the market's expectation of 30-day volatility. Often referred to as the "fear gauge."
• Bellwether: A leading indicator of future trends; in this case, Canadian banks as an indicator of the Canadian economy.
• Loan Loss Provisions: Funds set aside by financial institutions to cover potential losses from loans that may default.
• Scarcity Value: The increased value of a commodity or asset due to limited supply and increasing demand.
• Reserve Life: The estimated number of years a resource (like oil) can be produced at a given rate.

Market Concerns & Sector Rotation (February 2026)

The market is currently experiencing a downturn at the end of February, driven by concerns surrounding AI disruption, substantial tech spending (particularly on server farms and data centers), and escalating geopolitical tensions, specifically speculation about potential US military action against Iran to curb its nuclear program. Despite the US economy being barely up in 2026, the MAG 7 stocks, previously market leaders, are all down for the year. This signals a potential shift in market leadership, a “rotational trade” as described by Chad Larson, Senior Portfolio Manager at MLDD Wealth at CG Wealth Management.

The prevailing narrative is that the outperformance of the MAG 7 is unsustainable. Even Nvidia’s earnings beat resulted in a stock price decline, indicating investor fatigue and a search for new opportunities. Larson notes that expecting continued gains from the same stocks indefinitely is unrealistic.

Emerging Investment Areas

Investors are increasingly exploring sectors outside of technology. The Dow Jones Industrial Average is showing resilience, driven by industrials and materials. Oil prices are rising, and Canada, as a resource-based economy, is expected to benefit. International equities are also attracting investment due to their perceived stability. Specifically, gold and the gold complex are highlighted as promising areas.

A key theme is a preference for “predictable, stable cash flows,” with “boring being beautiful” again. Investors are prioritizing companies with consistent earnings over high-growth, potentially volatile tech stocks. Guidance from companies is now a primary driver of market value, surpassing the impact of simply meeting earnings expectations.

Heightened Volatility & Geopolitical Risk

Market volatility is increasing, evidenced by fluctuations in the VIX. The significant military mobilization in the Gulf region (the largest since 2003) is contributing to this volatility and impacting oil prices. This geopolitical risk is seen as a positive for resource-rich countries like Canada.

Investor Sentiment & Behavioral Biases

Clients are expressing nervousness about their tech stock holdings, particularly after realizing substantial gains. There’s a tendency to delay selling winners for tax reasons, but a growing awareness that the tech rally may be losing steam. Larson points out the emotional difficulty of selling successful investments, framing it as a “reframing of how people’s emotions are positioned.”

A common investor mistake – “cutting your flowers and watering your weeds” – is highlighted. This refers to the tendency to take profits on winning investments while holding onto losing ones, despite the potential for further losses. Larson emphasizes that an investment thesis shouldn’t be abandoned solely based on price action. He quotes, “Good things…can compound. An investment thesis doesn’t change because of price action.”

Canadian Banks & Housing Market

Canadian banks are considered a “bellwether” for the Canadian economy. Recent reports, like RBC’s, show loan loss provisions are in line with expectations, and mortgages are currently stable, though not exceptionally healthy. While the 5-year chart for the Canadian bank index appears positive, concerns about the Canadian housing market are weighing on investor sentiment, contributing to a 2% drop in the index on the day of the discussion.

Energy Sector Outlook

The energy sector is viewed favorably, even with fluctuations in Brent crude prices. A key driver is the increasing scarcity of commodities, with fewer companies controlling larger portions of resources, creating an “oligopoly.” Dave Zabanka of Canoe is cited as providing a strong framework for understanding this thesis. Private equity activity and mergers & acquisitions (M&A) are further bolstering the sector. Larson states they are “bullish on energy equities.”

The oil sands, in particular, are seen as “forever assets” due to their long reserve lives (upwards of 90 years) and the fact that similar assets are unlikely to be discovered again. Traditional valuation metrics (5-6x cash flow) are considered inadequate for these long-lived assets.

Logical Connections

The discussion flows logically from broad market concerns (AI, geopolitics) to specific sector rotations. The analysis of investor sentiment connects to the discussion of behavioral biases, explaining why investors might be hesitant to sell winners or hold onto losers. The Canadian bank discussion is framed within the context of the Canadian economy, and the energy sector outlook is linked to the broader theme of scarcity and long-term value.

Conclusion

The market is undergoing a period of transition, moving away from the dominance of the MAG 7 tech stocks towards sectors offering more stable cash flows and benefiting from geopolitical factors. Investors are becoming more cautious and aware of the risks associated with continued tech investment. Sectors like industrials, materials, energy, and international equities are gaining traction, while Canadian banks are closely watched as indicators of the Canadian economy. The key takeaway is the importance of diversification, disciplined investment strategies, and avoiding common behavioral biases like selling winners too soon and holding onto losers for too long.