Executive Summary 

• The equity bull market has lost some steam in the early part of 2026 while leadership has shifted beneath the surface.
• Diversification is having its moment, with mega caps and overrepresented sectors underperforming this year.
• Small caps have begun to outperform after reaching an earnings inflection point.
• Value stocks have rebounded after touching extreme relative undervaluation compared with their growth peers.
• Investors should continue to tilt toward small caps and diversification while avoiding material value/growth tilts.

Leadership has shifted beneath the surface, benefiting value, small cap, and diversified approaches

• The bull market in equities has lost some steam amid geopolitical-driven volatility after a significant rally from last spring’s lows.
• Beneath the surface, equity performance has begun to shift, favoring value over growth, small caps over large caps, and the average stock over the mega cap names that led the market in 2025.

Shown are total return figures for the full year 2025 and 2026 year-to-date, through the latest date shown. Value vs. Growth is represented by the relative performance of the Russell 1000 Value index less the Russell 1000 Growth index. Small vs. Large is represented by the relative performance of the Russell 2000 index less the S&P 500 index. Equal vs. Market Cap Weight is represented by the relative performance of the S&P 500 Equal Weight index less the S&P 500 index. Past performance may not be indicative of future results. One cannot invest directly in an index.

Diversification is having its moment, with mega caps and overrepresented sectors underperforming this year

• A big reason that the standard S&P 500 index has underperformed its equal-weighted variant is the notable underperformance of the largest companies. The Magnificent 7 are down this year, while the rest of the index is roughly flat.
• Sector allocations are also playing a role, as size has been the dividing line between positive and negative returns this year. The sectors with the lowest weight in the S&P 500 have greater representation in the equal-weighted index and have contributed to its outperformance.
  

Shown in the left panel are total returns for the Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla) on a market capitalization weighted basis in blue and the S&P 500 excluding the Magnificent 7 in green, for calendar year 2025 and year-to-date 2026 as of the latest date shown. Shown in the right panel are the year-to-date 2026 total returns for each constituent sector in the S&P 500 and their average weight in the index. The S&P 500 is a market capitalization weighted index of U.S. large cap stocks. This visual should not be interpreted as a recommendation to buy, hold, or sell any specific securities or sectors. Past performance may not be indicative of future results. One cannot invest directly in an index.

Small caps have begun to outperform after reaching an earnings inflection point

• Small caps have begun to outperform as earnings momentum turns more favorable, marking an inflection point after a weaker stretch over the past few years.
• Following roughly 18% earnings growth in 2025, small cap earnings are expected to accelerate sharply to about 48% in 2026. 

Value stocks have rebounded after touching extreme relative undervaluation compared with their growth peers

• Value stocks have rebounded after trading at a significant discount to growth in October of last year, a relative valuation gap that appeared increasingly stretched and susceptible to mean reversion.
• As it stands now, the valuation differentials appear much more reasonable by historical standards.
  

Investors should continue to tilt toward small caps and diversification while avoiding material value/growth tilts

• Expected returns continue to appear more favorable outside the largest index names, with small caps and more balanced exposure offering a more compelling opportunity set.
• At the same time, the case for a material value or growth tilt looks less enticing, as relative valuations between the two have moved back toward a more normal range.