INSIGHTS

On January 20, 2026

AAM Viewpoints — 4 Potential Ways Investors Can Win in a Broadening Market

For much of the past two years, the bull market has been a "top-heavy" affair. Driven by a handful of mega-cap technology giants, the S&P 500 marched higher while the "average" stock often sat on the sidelines. As we move into 2026, the narrative appears to be shifting as both the Russell 2000 Index, and the S&P 500 Equal Weight Index, have gotten off to hot starts ahead of the S&P 500 Index.

Easing inflationary pressures and a more accommodative Federal Reserve have paved the way for a "broadening" market — a scenario where cyclical sectors, small-caps, international and value stocks may finally join the rally.

For investors, this potential shift creates challenges, but it also creates opportunity. The playbook of relying solely on market-cap-weighted strategies, or beta driven investments, may soon lead to over-concentration in expensive tech names just as the rest of the market begins to lead.

Below are some potential ways…from weighting schemes, to asset classes, to help navigate a broadening bull market.

1. Neutralizing Concentration

With the massive run-up in AI and mega-cap tech stocks through 2025, many “diversified” portfolios are now dangerously “top heavy.” In fact, the top 10 holdings in the S&P 500 index account for roughly 35% of the index’s total value. Surprisingly, this number approaches 60% in some large cap growth indices. This “top-heavy” structure means performance is increasingly dependent on a handful of mega-cap tech giants.

A simple way investors can minimize this concentration risk is through alternative weighted strategies, including Equal-Weighted options, or utilizing strategies with High Active Share. These alternatives, often tilt toward smaller and/or undervalued companies and may be beneficial if the “Magnificent Seven” don’t lead the next leg of growth.

1. Equal Weight Strategies — Unlike its market cap weighted counterpart, equal weight strategies treat each holding in the portfolio as an equal partner, regardless of its market size.  A simple equal weight approach can help shift the “power” from a “few” to “many” and ensure that a single stock can’t sink the ship.
   
   
2. High Active Share Strategies — “Active Share” is a metric from (0%-100%) that measures how much a portfolio’s holdings differ from its benchmark index. This calculation is often used to determine the “value” of an active manager but in this instance, it can help identify those managers, or strategies, that may help reduce concentration risk by intentionally deviating from major indices.     
   

Both can help reduce "single-stock risk" and ensure the broadening out of the market moves the needle within investors’ portfolios. 

2. Rotating into Cyclicals

Broadening markets typically favor "cyclicals" — those companies whose profits are highly sensitive to the economic cycle and thrive when the economy is humming but not overheating. In the current goldilocks scenario, the following sectors may become the primary beneficiaries:

• Financials: Benefit from increased lending activity and a steepening yield curve.
• Industrials and Materials: Policy-led growth, such as domestic infrastructure spending and the "re-shoring" of manufacturing, has turned these once-stagnant sectors into possible growth engines.
• Energy: The energy sector currently accounts for only 2.9% of the S&P 500 but its long-term average since 1995 is 7.5%. This may signal a long “runway” for the sector as the bull market broadens.   

3. Embracing the Small-Cap Revival

In early 2026, the “Small-Cap Revival” has moved from a theoretical prediction to a dominant market reality. As of January 15, the Russell 2000 Index sprinted to an 8% year-to-date return, easily outperforming its large cap counterparts.

Here is why we believe the case for small caps are so compelling right now:

1. Historic Valuation Discounts — Entering 2026, the valuation gap between small and large-cap stocks reached a 25-year extreme. Historically, when these levels are reached, small caps tend to outperform significantly over the subsequent 3-5 years.
2. Interest Rate Relief — Historically sensitive to interest rates, small caps struggled during the hiking cycle. The Fed’s easing cycle may provide immediate relief to small-cap balance sheets.
3. Accelerating Earning Growth — While 2024 and 2025 were dominated by AI-driven large cap earnings, 2026 is projected to be the year small cap earnings growth may out pace their large cap counterparts.
   

Perhaps the clearest sign of a broadening bull market is the resurgence of small-cap stocks and we’d argue, its time investors embrace it.

4. Global Diversification: Looking Beyond the U.S.

After a decade of U.S. “exceptionalism” led by mega-cap tech, the broadening of the bull market is pulling global markets into the spotlight, and rightfully so. In 2025, the MSCI EAFE index outperformed the S&P 500 by 13%, and 2026 looks promising as several structural and macroeconomic trends continue to unfold:

1. Valuation Convergence — U.S. AI-driven tech stocks enter 2026 with historically high valuations while regions like, Europe and Emerging Markets, offer much lower valuations. We think this potentially provides a “margin of safety” for investors wary of a U.S. market correction.
2. Global Monetary Easing — While the U.S. Federal Reserve began cutting rates earlier, many international central banks were equally aggressive in 2024 and 2025. The effects of these cuts are expected to fully benefit international economies in 2026.
3. Currency Tailwinds — After a period of extreme strength, the U.S. dollar is facing headwinds due to narrowing inter rates differentials and concerns over U.S. debt levels.
4. AI 2.0 — While the U.S. dominates AI software and chips, 2026 is shaping up to be the year of AI adoption and international markets are positioned well to potentially reap the rewards of AI integration.
   

The tailwinds for international equities are mounting and investors are taking notice.  

Conclusion:

As we enter 2026, investors are facing a market environment that looks starkly different from the tech‑driven surge of the past several years. With leadership broadening across sectors, styles, sizes, and geographies the opportunities — as well as the risks — are shifting. By reducing concentration, selectively rotating into cyclicals, embracing the small‑cap resurgence, and expanding global exposure, investors can position their portfolios for a more balanced and potentially more durable phase of the bull market. In a landscape no longer defined by a handful of mega‑cap names, thoughtful diversification may once again become the most powerful potential tool for capturing what could come next.

CRN: 2026-0116-13136 R