2026 Outlook Broaden equity exposure beyond mega-caps

Advisor takeaways for client conversations:

  • Market leadership is broadening beyond the largest tech stocks.
    As artificial intelligence (AI) and data-center investment begins to mature, earnings growth is spreading across more companies, creating opportunities beyond mega-caps.
  • Mid- and small-cap stocks may see faster earnings growth.
    Smaller companies often feel economic improvement more quickly. With lower starting valuations and higher operating leverage, even modest growth can translate into stronger earnings growth over time.
  • Broader exposure can improve diversification.
    Adding mid- and small-cap stocks helps reduce reliance on a handful of mega-cap technology companies while also increasing exposure to more cyclical, domestically focused areas of the market.

For much of the past several years, a narrow group of mega-cap technology stocks – the so-called Magnificent 7 – has dominated US equity returns. The group’s market leadership has been well earned, driven by scale, innovation, and massive investment in AI infrastructure. However, as we look ahead to 2026, the opportunity set is expanding beyond this concentrated leadership, signaling a potential shift toward broader market participation.

A defining force shaping this transition is the unprecedented mega-cap capital expenditure (capex) cycle. Investment in AI, semiconductors, cloud, and data centers has reached a scale where its economic impact is increasingly flowing downstream. Historically, the most durable phase of such cycles occurs not during peak infrastructure buildout, but as spending shifts toward implementation, adoption, and productivity gains. We believe this environment strongly favors mid-cap companies specializing in software, information technology (IT) services, cybersecurity, analytics, and automation, where enterprise budgets expand and revenue growth becomes more sustainable.

Sector dynamics further reinforce this opportunity, in our view. Mid- and small-cap industrials companies tied to power systems, electrical equipment, automation, and infrastructure upgrades are benefiting from data-center expansion and reshoring trends. At the same time, the mid- and small-cap healthcare sector enters 2026 with one of its strongest backdrops in years, supported by improving US Food and Drug Administration (FDA) approval trends, renewed biotech funding, rising merger and acquisition (M&A) interest ahead of the late-decade patent cliff, and accelerating procedure volumes. Additionally, healthcare IT and tools companies add incremental upside through AI-driven productivity.

In addition, small-cap equities add another compelling layer through operating leverage. While their expected sales growth is broadly similar to that of large-caps, small-caps are currently trading at meaningfully lower valuations. With higher fixed-cost structures, easing interest expense, and improving economic momentum, incremental revenue growth can translate into disproportionate earnings acceleration – an attractive setup as markets move from narrow to broad leadership.

From a portfolio construction perspective, the chart below underscores the diversification case. Compared with large-caps, mid- and small-cap indices provide meaningfully lower exposure to mega-cap technology and greater exposure to industrials, financials, energy, and materials, offering investors a more balanced way to participate in the next phase of the market cycle.

More diverse sector exposure with small- and mid-caps
Difference in sector weights relative to Russell Top 200® Index

Difference in sector weights relative to Russell Top 200®
                                 Index chart

Source: FactSet, as of December 31, 2025.

Taken together, these dynamics suggest to us that 2026 may mark a transition from a narrow, mega-cap-led market to a broader and more inclusive expansion. For investors looking to widen their equity exposure beyond the Mag 7, mid- and small-cap equities may offer a compelling blend of earnings acceleration, valuation support, operating leverage, and diversification.

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