- Sector opportunities, as capital spending and new depreciation incentives support broader adoption of AI across industries such as healthcare, manufacturing, transportation, and financial services;
- Profitable US small- and mid-cap equities (SMID caps), which offer relative value and are positioned to benefit from lower interest rates and renewed merger and acquisition (M&A) activity;
- Emerging markets (EM), which remain meaningfully under-owned and undervalued relative to their weight in the global economy.
Expanding sectors new opportunities in 2026
The events of 2025 have demonstrated that equity markets can adapt to policy shocks more quickly than expected.
Thus far, technology infrastructure providers have been the main beneficiaries of AI adoption. In the year ahead, we anticipate broader implementation across industries such as healthcare, manufacturing, transportation, and financial services. This “AI 2.0” phase — moving from infrastructure build-out to enterprise-wide application — could provide a meaningful tailwind for corporate earnings growth in 2026.
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We also expect 2026 to mark the beginning of a renewed capital spending cycle. New depreciation rules may provide significant incentives for corporate investment, coinciding with an innovation wave led by AI.
Added fiscal stimulus from the One Big Beautiful Bill Act (OBBB), coupled with deregulation and reduced policy uncertainty as the current administration enters its second year, could further reinforce the outlook. Together with lower rates, these conditions set the stage for broader earnings growth and a more favorable environment for areas of the market that have been overlooked.
Why SMID caps are back
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Valuation spreads highlight ongoing imbalances in equity markets. While headline indexes like the S&P 500 appear expensive, opportunities exist further down the market-cap spectrum, where companies with stronger earnings growth, cash flow generation, and potential for multiple expansion create a more attractive risk/reward profile.
Market breadth has already begun to improve, and we expect this to continue as leadership extends beyond the handful of mega-cap growth stocks that dominated in recent years. While the AI trade remains well supported, we see growing room for earnings expansion outside the Magnificent 7, particularly given the historically wide valuation gaps between large caps and SMID caps.
Four catalysts could drive SMID caps in 2026:
- Interest rates: As the Fed continues its easing cycle, smaller companies with reliance on floating-rate financing should be among the primary beneficiaries.
- Quality rotation: The 2025 small-cap rally was led by lower-quality companies. Sustaining momentum this year will require a shift toward fundamentals. We believe earnings strength, cash flow generation, and balance sheet resilience will define the next phase of performance.
- M&A activity: Lower rates and greater policy clarity should encourage dealmaking. SMID caps are likely to be attractive targets, particularly in sectors such as financials, health care, and industrials.
- Stronger earnings growth: If macro conditions remain stable and the Fed pursues a moderate easing path, earnings breadth should improve across many industries, providing a rich backdrop for SMID-cap companies.
Emerging markets: Undervalued and under-owned
Emerging markets present a compelling opportunity set. As the backbone of the global hardware build-out, they will likely continue to benefit from productivity gains across industries as AI adoption spreads. In addition, sovereign credit ratings are now at their highest levels in more than 30 years, reinforcing improved fundamentals alongside supportive drivers such as a relatively weak US dollar, attractive valuations, and lighter positioning.
Global allocations to EM equities have fallen considerably over the past decade, leaving room for rebalancing and potential inflows. From our perspective, even a modest reweight could translate into significant capital moving into the asset class.
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Policy support in China continues to create tactical entry points, though near-term uncertainty remains elevated. Brazil and India both showed solid momentum and policy steadiness in recent months, and we expect these trends to carry into 2026. More broadly, demographic advantages across several EM economies should provide a structural underpinning for long-term growth.
How to forge the path toward into 2026
Multiple tailwinds underpin our outlook:
- The Fed’s easing cycle, which should support valuations and a broadening of market performance;
- Potential deregulatory shifts that could reduce costs for smaller companies;
- A corporate investment revival, spurred by AI adoption and depreciation incentives.
Our research underscores that long-term performance is rooted in quality and fundamentals, making investor discipline essential amid shifting market conditions.
Maintaining diversification across sectors, market caps, and geographies — while staying anchored in quality — remains, we believe, the best way to capture the broadening opportunities we see ahead.
Ann Miletti is head of equity investments, chief diversity officer, Allspring Global Investments
