There's More to Growth Than AI

• Investors have reduced expectations for Fed rate cuts, tightening liquidity conditions that previously fueled speculation in AI and momentum-driven stocks
• Non-U.S. profit growth is accelerating and converging with U.S. growth rates, making international equities more competitive after years of underperformance based solely on valuation
• Market breadth expanded significantly in early 2026, with broad U.S. and global indices outperforming the Magnificent 7, marking the end of the narrowest market period in 35 years

Market Summary: Broadening Growth Beyond AI Stocks

Key Investment Shift

Market leadership is rotating away from AI and technology stocks as tightening liquidity conditions and improving fundamentals across broader sectors create new opportunities. Richard Bernstein, Global Head of Macro & Customized Investing at Janus Henderson, identifies this trend as investors recalibrate Federal Reserve rate cut expectations.

Critical Market Dynamics

• Investors have revised year-end 2025 Fed forecasts, pricing in reduced liquidity that previously fueled speculation-driven momentum investing
• The 2023-2025 period marked the narrowest market concentration in 35 years, exceeding even the 1998/99 Technology Bubble
• Market breadth expanded in first half of 2026, though still below long-term median levels

Profit Growth Expanding Globally

U.S. profit growth appears to be peaking while non-U.S. markets show accelerating earnings cycles, creating convergence between domestic and international profit growth. Notably, only one "Magnificent 7" stock appears among ACWI Index companies projecting 25%+ long-term growth, demonstrating global diversification of growth opportunities.

Performance Data

Five broad U.S. and global indices significantly outperformed the Magnificent 7 stocks during first half of 2026. International equities now offer competitive growth stories alongside their traditional valuation advantages.

Investment Implications

The analysis suggests markets are transitioning from momentum-driven speculation to fundamental-based performance. This rotation is occurring without triggering a bear market, contrary to many investor expectations. The recommended strategy emphasizes dividend-paying stocks and non-U.S. equities.

Outlook

If inflation forces the Fed to maintain tighter liquidity and profit growth continues broadening, shorter-duration stocks and companies with improving, underappreciated fundamentals may continue outperforming previous market leaders. The shift represents early stages of a potentially longer-term broad market advance.