BOURGEON CAPITAL MARKET INSIGHTS
"Respecting Gravity" The title of a research report by Rick Rieder, Chief Investment Officer of Global Fixed Income for Black Rock
As we write this letter, we are on the 28th day of Operation Epic Fury with no real end in sight, even with the President’s daily optimistic tweets. The Chaos Train of 2025 has moved through a period of investors being “Shakily Optimistic” to the point where we believe “Respecting Gravity” is probably the most prudent trade. Since the beginning of 2026, complacency has been present in both the equity and fixed income markets, even as rates began to rise, credit spreads began to widen, and inflation began to creep up. Once the war with Iran began, energy prices spiked, and coupled with chaos in Congress, markets began to unravel. Even the Magnificent 7 stocks and the Artificial Intelligence (AI) dream ran into the hard reality of costs negatively impacting free cash flow.
While we had entered 2026 cautiously optimistic, as the US economy was set up for first-half prosperity, that has rapidly begun to falter as the war in Iran drags on. Our cash-raising focus became aggressive as we sold many long-term and short-term successful technology trades, feeling that markets were not appropriately pricing in risks. Hence, investors were not “Respecting Gravity”. Our cash levels are now close to 17-20%, near historical highs for Bourgeon, as we prepare for what we fear could become a war-induced, worldwide recession. We want to emphasize that while our guard is up in the short term, we are bullish in the long term. It is our nature to be cautious, and by being so we sometimes sound negative. It is important that we consider the downside as well as the upside. We make decisions as a fiduciary.
There are lots of exciting things coming! There have been good decisions for the country over the last 3-5 years that should help fix many of the problems in our economy. We needed an infrastructure bill. We need to invest in alternative energy, US technology, and in a more modern defense and space system. We need better health care and more support for scientific research. We are true believers in AI and are excited about new technologies in nuclear, quantum computing, and even fusion. We are actively weighing both the risks and rewards as we move forward. We are waiting, watching, being patient and prudent. Investment opportunities will present themselves to those who stay actively involved.
Investing Risks Increasing in Many Areas: War, Private Credit, Valuations, AI Costs, Yields, and Investor Sentiment
In addition to the fallout from the war with Iran, we are seeing risks increasing in other areas:
- Concern in credit: investors leaving private credit, and widening credit spreads
- Signs of weakness in private equity
- AI valuation and profit concerns
- Collapse of business sentiment in both large and small businesses.
- The compounding effect of higher fuel costs affects many other areas of the economy.
The mood of the consumer has turned sour, putting even more weight on the fall elections as both sides struggle politically to jockey for position.
Our View on How the Iran War is Impacting Markets
Unfortunately, in the “fog of war,” it's hard to say where we are headed in the short term. As of March 28, we expect this war to go on for a few more months, risking higher costs, more casualties, and higher oil prices.
The closure of the Strait of Hormuz, if it lasts a few more weeks, will have dire consequences for fuel prices, particularly in the Middle East and Asia. It takes roughly 20 days for cargo to get to Asia, and the last ships have just arrived. No more ships are coming until the Strait is opened. The entire area will be scrambling for fuel and chemical feedstocks. If the Houthis increase their attacks on the Red Sea (closing the other shipping lane for the Middle East), prices could rise to $150-$200 a barrel, according to JPM’s Commodity group. Europe and Africa will be the next areas to be hurt by the shortage.
Wait, Watch, Be Patient, Be Prudent
So where do we go from here? We continue to think that the various crosswinds in the economy will affect markets for some time. In four of the last five energy crises, we have had economic recessions and market selloffs. For many investors, other than the start of the Ukraine War, they have never lived through or invested through an energy and commodity shock.
While it will take time, we still have faith in most of our multi-year themes, such as defense, energy, power, transmission, manufacturing, healthcare, and industrial, as well as various AI trades. At the start of 2026, we trimmed various positions within those areas given their dramatic run-up in the last 2 years. We now feel that we have ample cash liquidity (17-20% of equity portfolios) to take advantage of any further weakness over the next 2-3 months.
For the first quarter of 2026, the S&P was down 4%, and the Nasdaq was off 6%. Until we know the extent of the damage and duration of the war and how high oil prices we will go, we can’t comfortably, safely and accurately make complete investment decisions. It's time to wait, watch, be patient, and be prudent. There is no reason to panic, as many opportunities will appear.
As many of our long-term investors have experienced, we like to see these painful corrections that readjust values, and we are not afraid to make a stand to buy or add to positions that we find to be excellent long-term values even in stressful times. It's part of the old Berkshire adage of buying when others are fearful. We do expect short rates to rise another 25-50bps if oil goes above $115, but we think the bulk of the move is already priced in. That clearly can’t be said yet for the equity markets, so we expect the weakness to continue if this war continues at its current pace.
We have seen the weakness broaden out to Financials. Weakness in the Financial sector makes it difficult for the overall market to rally. Software continues to be the weakest sector as concerns about sales and profit in the age of AI story permeates investors' minds and attitudes.
We believe the markets have been way too optimistic about 2026 earnings, sales, and margins, with many Wall Street strategists raising their estimates even in the last 30 days. We believe that is unlikely to happen given the compounding effects of rising oil prices. Couple that with rising rates, and valuations should contract.
There is likely to be synchronized weakness worldwide as all economies struggle to deal with this energy crisis, which is much larger than we think people expect. Most investors and countries were unprepared for such dramatic fallout, and it will take time to see the full repercussions. This will likely continue to shake investors' confidence.
Cracks in AI and Data Center Stories are Growing
The use of artificial intelligence requires large data centers, which consume substantial amounts of electricity. The electricity infrastructure in the US is not sufficient to support the projected buildout of these data centers. Questions surrounding the profitability of large capital investments of $650-700B annually for 3-5 years continue to haunt the AI and data center space. Political battles surrounding higher electric prices for consumers are now front and center in the Fall elections. Bernie Sanders and Alexandria Ocasio-Cortez have put forward a bill to halt data center build-outs until consumer electricity costs are resolved.
Even more concerning, lately, there is speculation that AI may lead to slowing growth in many well-loved technology sectors, such as software. For example, the stock prices of many cybersecurity and DRAM companies are suffering from speculation that AI may make the companies obsolete over time. Concurrently, OpenAI, Anthropic, and SpaceX/Grok plan their highly valued IPOs in their desperate grab for much-needed cash for their data center build-outs.
Risks and Opportunities in the Face of a Triple Threat: Q1 Portfolio Shifts
We are closely monitoring the investing markets at a time of a triple threat: War, Credit, AI/Tech weakness. Where there are threats, there are also opportunities. These are very exciting times for Bourgeon, as we are actively involved in your investments and we have 17-20% cash (vs. 5-7% in December 2025).
We trimmed or fully sold many positions near or at recent all-time highs. We sold holdings that underperformed our expectations. We added to companies where we liked the risk/reward. Finally, we introduced new investments into the Bourgeon portfolio where we liked the risk/reward and the secular theme:
As we trimmed/sold several semiconductor companies in our portfolio that surpassed our expectations on the upside, we looked for replacements and found a company that produces semiconductors primarily for the automotive market. Price-to-earnings multiples for 2026 are 11x, and we anticipate the 2026 EPS growth rate to be 20%. We believe the company provides growth at a reasonable price.
We purchased a solar energy equipment maker. We believe that in today’s environment, investors will look positively towards all types of energy companies. In 2025, this company was down 53% as investors shunned alternative energy companies. We see 2026 as a turning point as earnings and analyst recommendations begin to trend upwards.
We added a company that explores, develops, produces and markets natural gas and crude oil. The stock has been exceptionally strong this year as oil prices have risen with the war in Iran.
Given all the economic uncertainty, we felt it would be prudent to add more stable companies to our portfolio. We purchased a healthcare company that we believe is close to making a turn in their overall business. The dividend is safe and secure and gives us good stability in turbulent times.
Alternatives in Bourgeon Portfolios
Throughout the quarter, we continued to deploy capital to various alternative strategies. We differentiate these strategies between: Private Equity, Private Infrastructure, Private Credit and Private Real Estate. We also consider Real Assets to be an alternative exposure, but we access this through a fully liquid, daily traded mutual fund.
The alternative space has become increasingly accessible to a broader range of investors. New participants in an asset class (as opposed to institutional investors) may not know how the asset class can behave over a cycle or the nature of how they are accessing it. Much like Private Real Estate in 2022-23, Private Credit is having a moment in which investors are asking for more money back than managers are required to provide. These limitations are meant to protect the investors willing to stay in the fund. The practice undoubtedly makes for bad headlines, but they are purposely built into the offerings and should be understood by the advisor and investor.
Private lending may have some sector specific concerns or increases in defaults, but we believe the asset class will be able to weather the storm: almost all loans are the most senior secured capital in the structure, average loan to value in direct lending is much lower than in prior periods providing a larger equity buffer, leveraged loan defaults are down 100bps this year, leverage in these portfolios is very low… nothing like the banks in the GFC.
Mutual Fund Portfolio
Our model portfolios are designed to trade broadly in line with the global markets and asset classes to which they have exposure. As such, the US, International and Emerging market positions all saw their mid-quarter gains turn roughly flat or negative by the end of the quarter. Similarly, bond positions had offered a decent return to start the year until rates rose on the outbreak of the Iran war. One asset class within the portfolios that remained positive by quarter’s end was Real Assets, where these portfolios have exposure.
The diversification from these model portfolios provided some relative outperformance. Because of the extreme concentration in US indices to large-cap technology companies, the cap-weighted S&P 500 and Nasdaq 100 were down significantly by quarter-end. Our model portfolios broaden out equity exposure to various international markets, mid and small cap companies, as well as real estate, real assets, and dividend-paying companies. Collectively, this set of diverse exposures helped keep the overall portfolio performance better than those indices.
Within the quarter, we swapped one holding from the mutual fund strategy of an asset manager to their similar ETF strategy. We see the ETF wrapper as advantageous to a mutual fund, and we may look to do more of this over time.
Yields Rise and Spreads Widen with Concerns Over Inflation and Private
The bond markets are also dealing with uncertainty and volatility. Initially, in Q1, the economy was holding up better than people expected, and inflation started to rise. Expectations of Fed Rate cuts dwindled, even with Warsh (a dove) becoming the nominee for Fed Chair. Subsequently, with the war in Iran, and oil prices rising, inflation expectations continued to rise, putting further upward pressure on yields. Finally, we are beginning to see concerns growing in the private credit markets. During Q1 there were several private credit companies that were unable to meet all investor redemption requests. As a result, credit spreads have widened. Bourgeon is taking the opportunity to invest in investment-grade corporate bonds and muni bonds with yields reaching 4.5% - 5.0% on a tax-equivalent basis.
We look forward to speaking with you soon and thank you for entrusting us with the management of your money. Please call if you would like us to walk you through our opinions in more detail.
This letter should not be relied upon as investment advice. Any mention of particular stocks or companies does not constitute and should not be considered an investment recommendation by Bourgeon Capital Management, LLC. Any forward-looking statement is inherently uncertain. Due to changing market conditions and other factors, the content in this letter may no longer reflect our current opinions. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this letter will be profitable or suitable for your individual portfolio. In addition, past performance is no indication of future results. Please contact us if you have any questions regarding the applicability of any matter discussed in this letter to your individual situation. Please contact us if your financial situation or investment objectives change or if you wish to impose new restrictions or modify existing restrictions on your accounts. Our current firm brochure and brochure supplement is available on the website maintained by the Securities and Exchange Commission or from us upon request. You should be receiving, at least quarterly, statements from your account custodian or custodians showing transactions in your accounts. We urge you to compare your custodial statements with any reports that you receive from us.
