The best offense

November 10, 2026

With the midterm elections behind us, we analyzed the output of Pave’s models for insight into the current environment and what it implies for portfolio construction and risk management as the year comes to a close. Across the nearly 25,000 securities scored, the numbers tell a story of a late-stage cyclical rotation that has lost leadership. Model scores continue to suggest a moderation of expected return potential while at the same time risk measures are rising.

Energy retains its strength

Energy continues to score well with moderate risk, carrying the strongest average score of any equity sector in the universe. 50.2% of Energy names scored positive, the highest share of any sector as well, and though its risk score is not especially low, it remains well below Technology and Healthcare. With nominal growth in the economy surprising to the upside, higher energy prices have not yet yielded a negative demand response for energy. With the seasonal transition to cold-weather months approaching, we will be watching out for factors that would directly or indirectly indicate a negative demand response from higher energy prices. We expect high diesel prices to continue to contribute to inflation through higher transportation costs and scarcity as supplies compete with rising seasonal demand for home heating oil.

Other late-stage cyclical sectors tell a different story. Industrials and Materials showed the weakest rankings, with fewer than a third of stocks in each sector scoring positive. The impact of the capital investment cycle remains focused on AI-related projects. Other industrial and late-stage capital-sensitive sectors have not yet felt a significant benefit from the onshoring of manufacturing.

Risk lives in the tail

The risk measure across securities carries a very long right tail, with one in ten scoring above 11, far from the median risk score of 3. The clearest signal of a shift in markets is the rise in the risk score for Technology, which now carries the highest risk of any major sector. And though the average score for companies in Technology is negative, Pave’s models can still find pockets of strength among individual tech names. It appears stock selection matters more than broad sector exposure at the moment. Healthcare shows a similar split, with strong names ranking alongside some of the highest-risk stocks in the universe.

Size and country point to the same conclusion, with mega-cap and large-cap names scoring better than small-cap, mid-cap, and micro-caps. Reflecting their sensitivity to higher costs of capital and higher discount rates, mid-, small-, and micro-cap stocks currently present unattractive risk scores, and we do not expect these scores to improve in the near term. At the country level, the US continues to present both positive scores and neutral risk, and remains the most attractive market on a relative basis. The largest components of the ACWI ex-US have either negative scores or high risk. Interestingly, there are countries with both positive scores and relatively lower risk, but all would be considered fringe markets.

Playing defense

Defensive positioning looks relatively attractive compared to broad market risk-taking, though it is too early to tell if defensive sectors are the new leaders. The average score for Consumer Non-Cyclicals sneaked into the positive this week, with a risk profile similar to Energy’s. Within the sector, about 1 in 12 names paired a strong score with low risk, more than any other sector in Pave’s universe. Though the signal is not as strong as Energy’s, Consumer Non-Cyclicals may be positioned as a defensive opportunity and a better place for lower-beta positive exposure.

Finance’s average score is still slightly negative, but its risk is among the lowest of the equity sectors. Utilities show a similar profile, with low risk and weak momentum. If scores begin turning positive for Finance, the sector could move into the attractive positive-score/low-risk quadrant quickly. We are watching to see how scores improve first before chasing the sector.

The political climate adds another layer of uncertainty. After the midterms, the direction of policy is a tremendous unknown, and there is a high chance of volatility in the months ahead. That leans into what the models are saying: be defensive right now, figure out which way the wind is going to blow, and then act accordingly. Stepping too far in one direction or the other in this environment is a recipe for disaster.

With leadership fading and risk concentrating in the tail, the models suggest increasing cash levels and reducing tracking error where possible. As we gain clarity on emerging sources of opportunity and risk, future optimizations will seek to migrate portfolios appropriately. The process and discipline governing Pave’s portfolio construction and optimization framework embeds changes in the expected return and risk environments and positions portfolios to provide the optimal exposure within the constraints and objectives established for each portfolio.

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By Martin Chanzit, CFA and Anusha Rodriguez

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