Sheltering Your Portfolio from Macro Shocks

The war in Iran, which has driven up oil and transportation costs, increased inflation, and weakened economic growth both domestically and globally, is a stark reminder of how macro forces can upend even well-laid investment plans.

"Recent market shocks of all types—including not just military conflicts but also artificial intelligence [AI], tariffs, and outsize weather events—have made asset-class performance and risk-return profiles less predictable than they've been historically," says Kasey McCurdy, CFA^®, chief portfolio strategist for Schwab Wealth Advisory. "Add to that today's near-constant stream of information that's often amplified or even distorted by social media, and it's no wonder investors feel pressure to act. But a 10- or 20-second headline shouldn't dictate a 10- or 20-year portfolio."

Rather than make wholesale changes that could undermine your long-term goals, Kasey and his colleagues suggest smaller tactical moves to cushion potential shocks. "Think of it as tuning out the noise instead of retreating from the market," Kasey says.

Consider these modest near-term moves to address today's top concerns.

The AI boom has accelerated market concentration, with a handful of technology companies dominating stock performance. Today, the so-called Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) account for more than a third of the S&P 500^® Index's market capitalization¹—up from about a quarter in 2020. This shift is also evident in emerging markets: Although the energy and materials sectors dominated the MSCI Emerging Markets Index in the past,² information technology now constitutes more than 40% of its makeup.³

Meanwhile, utilities—once viewed as defensive, cushioning portfolios during market downturns—have joined the AI trade on expectations of higher power demand. By some estimates, utility companies are expected to increase capital spending by 30% this year to upgrade infrastructure and scale up capacity in response to AI data center demands.⁴

"These shifts have profoundly altered both concentration and sector risk in ways investors might not notice," Kasey says.

Because many index funds are market-cap-weighted—meaning a company's total market value dictates its influence on an index's performance—investors might consider complementary strategies to counter the effects of tech dominance, including:

Equal-weighted indexes assign each constituent the same weight, reducing single-stock and sector concentration. "Equal-weighted indexes can help mitigate some of the sway that larger members could have," says Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research.

For example, this year we've seen a record stretch where the cap-weighted S&P 500 has moved in one direction even when a majority of constituent stocks moved in the opposite direction. "That can work in your favor when the biggest stocks are outperforming, but the reverse is also true," Kevin says. "If you're uncomfortable with a handful of stocks driving a disproportionate share of an index fund's returns, an equal-weighted approach might be worth considering."

Instead of tracking the market passively, factor investing tilts the stocks in a portfolio toward shared traits like low price or strong past performance. Because such characteristics are unrelated to market cap or sector, factor-based funds can also help guard against overconcentration risk.

For example, value or quality factors can help lessen the influence of tech on your portfolio since the former focuses on undervalued stocks while the latter prioritizes stable earnings, strong profitability, and high returns on capital. That said, you may pay higher fees since factor-based funds are actively managed, and there is also the potential for underperformance relative to the broader market.

Alternatively, momentum funds, which reward recent performance, typically rebalance toward market leaders frequently enough to help capture some gains. Case in point: Momentum funds outperformed in the first half of 2026 in part by capturing the market's shift toward energy stocks in the wake of the Iran war.⁵

Generally, companies with less than $2 billion in market capitalization tend to be more sensitive to domestic demand and interest rates. They rallied this year thanks to a resilient U.S. economy and investor skepticism about AI spending by some of the biggest players in tech.

Despite the gains, many portfolios remain underexposed to small caps because of mega-cap outperformance. Correcting this may be as easy as rebalancing back to your long-term asset allocations. "Just be sure that small caps—which tend to be more volatile than their larger-cap counterparts—are aligned with your risk tolerance and investing time horizon," Kasey says.

Developed international equities are much less concentrated in technology than are U.S. stocks. They also provide exposure to a different mix of currencies, sectors, and economic cycles, which can help further insulate an investor's portfolio from U.S. market shocks.

However, international markets can be complex, often lacking standardized reporting and extensive analyst coverage. As a result, professional management in the form of actively managed funds may be worth the higher fees than those of a passively managed international fund.

In particular, active managers of international stock funds, which are typically subject to different economic cycles than U.S. companies, can leverage local expertise to move among countries and sectors, steering away from concentration and other risks.

Geopolitical shocks have complicated the Federal Reserve's efforts to return core inflation to its 2% target. The war in Iran and broad U.S. tariffs, in particular, prompted an interest rate hike in September that pushed 10-year Treasury yields to their highest levels since 2007.⁶

"We've seen large fluctuations around Treasuries , creating uncertainty in what is typically a staid part of the market," says Collin Martin, CFA^®, head of fixed income research and strategy at the Schwab Center for Financial Research.

Stocks have broadly produced positive real returns during periods when inflation remained below 5%,⁷ which should help insulate equity portfolios from rising prices. However, higher rates also mean higher borrowing costs, which can erode earnings.

Targeted hedges can help protect purchasing power amid an uncertain inflation and interest rate environment. If you expect prices to remain high, you might consider:

TIPS link principal to the Consumer Price Index (CPI); when the CPI rises, the principal adjusts upward and investors receive larger interest payments.

That said, Collin cautions that their market price can still fall when real interest rates (rates after accounting for inflation) rise—and in the near term, that price decline can be larger than the inflation adjustment you receive. However, they may help over longer periods of elevated inflation. "You can purchase a 10-year TIPS with a 2.4% real yield, which could have you looking at 5.4% nominal returns each year over that time if inflation stays around 3%," he says.

Long-term Treasuries tend to experience larger price swings than short-term T-bills do when interest rates change—in part because their fixed payments extend further into the future, making their present value more sensitive to interest rates (when yields rise, prices fall, and vice versa).

That difference has been underscored amid this year's volatility. As of late September, short-term Treasury bond funds have generally produced positive returns, while long-term Treasury bond funds have lost value.

"Long-term Treasury holders have been hit hard by the higher-for-longer interest rates," Collin says. "Focusing more on short- to intermediate-term Treasuries could help mitigate that effect, at least in the short run."

Commodities such as crops, crude oil, and precious metals can help preserve purchasing power when supply-and-demand pressures feed inflation. If you expect those pressures to rise, a broad commodities basket may help ease the impact on your portfolio.

"While Schwab doesn't include a long-term strategic allocation to commodities in its model portfolios, the asset class nevertheless can be helpful on a six- to 12-month tactical basis as a way to diversify potential risks," Kasey says. Note that individual commodities can be subject to supply shocks, geopolitical uncertainties, and other factors that can result in periods of increased price volatility.
 

Despite some volatility this summer, investment-grade bond defaults remain at historically low levels. According to Moody's, the trailing 12-month issuer-weighted speculative-grade default rate rose to 5.3% in August, but it's expected to fall to 2.5% by August 2027.

The real issue for investors isn't whether companies will make good on their debts—it's how little they're being compensated for any additional risk vis-à-vis Treasuries. Corporate credit spreads (the difference in yields between corporate bonds and U.S. Treasuries) are near their tightest levels in almost three decades,⁸ in part because strong economic growth and robust corporate profits have convinced investors that the risk of default is low. Deteriorating economic and geopolitical conditions could upend this calculation, particularly if concerns grow over AI spending.

"If the outlook worsens and investors demand higher spreads, it can pull down the value of the bonds you already own in real time," Collin says.

If market conditions shift and spreads widen, bond prices will likely fall. Prioritizing steady, reliable coupon payments can help cushion your portfolio against potential price swings. Consider:

"For investors focused on income, yields from investment-grade corporates are still favorable, and we expect much of the potential return in the second half of the year to come in the form of income payments," Collin says.

Similar to investment-grade corporates, spreads from high-yield bonds are tight, but Collin feels their absolute yields remain attractive. "These bonds generally are more sensitive to changes in economic outlook or investor sentiment and have greater default risk, but in an environment where the economy continues to grow near its trend growth rate, modest exposure to high-yield bonds may be appropriate," he says.

Bond investing in the current environment may require more research than many investors are willing to undertake. Active fixed income managers, by contrast, specialize in evaluating corporate credit and identifying risks when yields appear unusually appealing. They may also be better equipped to assess bond issuers' exposure to specific sectors and themes, such as Al infrastructure financing.

Before adjusting your portfolio, consider not just your risk tolerance and time horizon but also whether selling investments in a taxable account could result in near-term tax consequences—ideally in consultation with your financial and tax advisors.

"It's very easy to get caught up in the noise and feel pressured to act," Kasey says. "Adding an objective voice can help quiet things down so you can make more informed and rational decisions based on facts, not fear."