We’re not suggesting the AI trade is over, but believe the environment is conducive to diversifying within the US markets.
For months, there hasn’t been a catalyst to spark investors to consider diversifying within the US stock market.
Improving growth and Fed easing could be meaningful developments for investors waiting for a reason to diversify.
When you do what we do for a living, you tend to hear people’s biggest concerns about their portfolios. Recently, the greatest concerns have been elevated valuations and heavy concentration of the S&P 500 Index.1 Surely, the narrative goes, an AI bubble is about to burst, and even if it doesn’t, a loss in momentum would weigh on the entire market. The concern is that the extraordinary gains driven by so-called hyperscalers (companies that provide massive-scale cloud computing services and infrastructure, enabling businesses to run applications and store data on a global network of servers) are increasingly becoming unsustainable.2
But there’s far less discussion about the possibility that a healthier US macroeconomic environment could provide the backdrop for a strong rotation into parts of the market beyond mega-cap technology. That possibility is a key theme in our 2026 annual investment outlook: Resilience and rebalancing.
When it comes to the artificial intelligence (AI) trade, many investors fear missing out on the market advance, but also worry about staying in too long. But, diversifying into lower valuation areas, such as smaller capitalization or value stocks, or adopting alternative weighting methodologies has largely gone unheeded. For months, there hasn’t been a catalyst to spark such a rotation. Global growth was slowing, and concerns lingered that inflation could re-emerge. In the aftermath of “Liberation Day,” uncertainty weighed on growth, while the risk of tariff-induced inflation kept the Federal Reserve (Fed) from acting as aggressively as it might otherwise have. Investors were left wondering if diversification was simply an antiquated theory, not a practical strategy.
But market activity last week seems to have affirmed our view that the picture is changing. Leading indicators globally have improved.3 The Fed acknowledged that growth had been improving and, at last week’s Federal Open Market Committee (FOMC) meeting, outlined expectations for even stronger growth in 2026, supported in part by productivity gains from AI.4 The Fed reduced rates by 25 basis points last week and signaled at least one more rate cut in 2026.5 In our view, improving growth combined with lower US interest rates likely creates a more constructive backdrop for stocks beyond the largest names.
The mega-cap technology trade has lost some momentum, even as the broad S&P 500 Index advanced to a new all-time high on December 11.6 For example, last week Oracle sold off on weaker-than-expected earnings, raising concerns about the debt it’s taking on to fund capital expenditures.7 Importantly, many of the other hyperscalers have significantly lower debt ratios.8 We’re not suggesting the AI trade is over. Rather, we believe the environment is becoming conducive to further diversification. Again, the S&P 500 Index traded this week at an all-time high, notwithstanding the fact that five of the Magnificent 7 stocks (Apple, Amazon, Meta, Microsoft, and Tesla) have underperformed the market this year.9 Small-cap indexes, like the Russell 2000 Index, and the S&P 500 Equal Weight Index, also closed at record highs last week.10
In short, improved growth and Fed easing are meaningful developments. For investors who’ve been waiting for a reason to look beyond mega-cap technology, the catalysts may finally be here.
Date |
Region |
Event |
Why it matters |
|---|---|---|---|
Dec. 15 |
US |
Empire State Manufacturing Index |
Provides early insight into regional factory conditions and manufacturing trends |
|
Eurozone |
Industrial Production (Oct.) |
Measures manufacturing output, key for assessing economic momentum in the eurozone |
Dec. 16 |
US |
Retail sales (Nov.) |
Critical gauge of consumer spending, a major driver of US economic growth |
|
US |
Business inventories (Oct.) |
Indicates supply chain health and future production trends |
|
UK |
Unemployment rate (Nov.) |
Labor market strength influences Bank of England policy decisions |
|
Japan |
Machinery orders (Oct.) |
Reflects capital spending intentions and industrial activity |
Dec. 17 |
UK |
Consumer Price Index (Nov.) |
Key inflation measure guiding monetary policy decisions |
|
Eurozone |
Consumer Price Index (Final, Nov.) |
Confirms inflation trends ahead of European Central Bank policy decisions |
Dec. 18 |
US |
Consumer Price Index (Nov.) |
Primary inflation indicator influencing Federal Reserve policy |
|
US |
Philadelphia Fed Manufacturing Index |
Provides insight into regional manufacturing conditions and economic outlook |
|
UK |
Bank of England Policy decision |
Determines interest rates and monetary stance, impacting GDP and markets |
A rate cut, which markets are pricing in despite Fed member differences, and an expected improving economy in 2026, could support stocks.
We believe global equities may continue to rise in the new year, and we expect new opportunities to be unlocked as market leadership evolves.
Get insight on the recent sell-off in the artificial intelligence trade, the potential for a Santa Claus rally, and the K-shaped economy.
Important information
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Image: Arctic-Images / Getty
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
A basis point is one-hundredth of a percentage point.
Diversification does not guarantee a profit or eliminate the risk of loss.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
The Employment Cost Index details changes in US businesses’ cost of labor. It is prepared quarterly by the Bureau of Labor Statistics. An investment cannot be made into an index.
The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.
Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified time period.
The Global Leading Economic Indicator (LEI) is a proprietary, forward-looking measure of the growth level in the economy. A reading above (below) 100 on the Global LEI signals growth above (below) a long-term average.
Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.
Inflation is the rate at which the general price level for goods and services is increasing.
The Magnificent 7 stocks refer to Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla.
The MSCI EAFE Index is an unmanaged index designed to represent the performance of large- and mid-cap securities across developed markets, including countries in Europe, Australasia, and the Far East, and excluding the US and Canada.
The price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share.
The Russell 2000® Index measures the performance of small-capitalization stocks and is a trademark/service mark of the Frank Russell Co.®
The S&P 500® Equal Weight Index is the equally weighted version of the S&P 500® Index.
The S&P 500® Information Technology Index includes stocks in the S&P 500 Index classified as information technology companies based on the Global Industry Classification Standard methodology. The index is market-cap weighted.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
The S&P 500® Value Index consists of stocks in the S&P 500® Index that exhibit strong value characteristics based on three measures: Book value-to-price, earnings-to-price, and sales-to-price.
The S&P SmallCap 600® Index measures the performance of small-capitalization stocks in the US.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.
A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock market.
The opinions referenced above are those of the author as of Dec.12, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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