Staying Diversified in 2026

Staying diversified looks like the best bet in 2026

 

Among the many themes equity analysts were likely forecasting for 2025 as they awaited the return of President Trump to the White House, continuing US exceptionalism was probably one of their stronger bets.

Forecasting is inherently uncertain. Even as the AI theme and extraordinary earnings from mega tech powered stocks higher over the course of 2025, US exceptionalism actually faltered, with the S&P 500 delivering the worst performance of any major equity market for the first time in 20 years¹.

In 2026, fundamentals may take over the reins as the key driver of global markets, particularly as earnings growth is forecast to be stronger than it was in 2025³.

Second, it’s possible that valuations could stretch further, even if they appear on the higher end relative to history. Goldman Sachs analysts make this point via some interesting observations about the equity cycle and patterns for how it moves around the economic cycle. Broadly, they describe four phases, which vary in terms of length and strength of returns, and assess that 2025 appeared to be a year of ‘optimism’ – a late stage phase where investors are confident (in some cases to the point of complacency) and valuations rise beyond earnings growth. They believe this ‘optimism’ will continue in 2026.

Finally, the global growth and policy environment is forecast to be supportive for the year. But conditions may diverge across economies meaning diversification may be useful not only for participating in any potential upside but also in mitigating downside risks that may play out on an individual market level too⁴.

It’s not just the regions

It wasn’t just geographic diversification that worked well in 2025, styles and sectors started broadening too. While in the US the ‘growth’ style continued its march, outside of the US the ‘value’ style generally did better, breaking a decade-long pattern where growth was the key driver of most markets.

Improving fundamentals across a number of value sectors such as financials and mining were in part to play, as too was the spill-over of capex spending from technology sectors into several ‘old economy’ infrastructure-related areas of the market.

But it was nuanced. Idiosyncratic elements rocked both styles, with unusual combinations of sectors under- and outperforming. Some have seen returns driven by earnings growth, others by improvements in valuations.

There’s also been a fall in what is referred to as stock pairwise correlations – in other words, individual stocks have been moving more independently of each other, driven increasingly by their fundamentals. One example is in tech, where share prices reactions have differed dramatically on account of how investors have been judging company spending plans and investments³.

This creates an ideal market not just for stock pickers and alpha generation, but where diversification benefits are potentially enhanced too.

We need to talk about…bubbles

Recently, there has been a lot of debate over whether the US market is in a bubble, particularly in tech. But it’s worth noting that the tech sector’s dominance started long before the emergence of AI, with its earnings having outstripped those of the global market for the last 15 years. What’s more, valuations appear less extreme when compared to other bubble periods, for example dotcom³.

There are some signs of exuberance, but investors seem to agree that AI is once-in-a-generation technology that is likely to be game-changing and will add value across sectors. As such, good stock picking is required to avoid investments in frothier parts of the market and companies that may destroy value.

It also infers that the US remains an essential part of any portfolio, and diversification and active investing is just as required in the US as it is in any market across the globe. 

Let’s not shy away from global equities

Of course, we couldn’t write a piece on diversification without mentioning the potential impact of geopolitics – a more unpredictable force with President Trump at the helm of the US government. This raises uncertainties as to which economies may get caught by sudden shifts in US foreign policy, in particular tariffs. Greenland and the temporary threat of tariffs on Europe is a good example in this regard.

As such, while as investors we may wish to bet on global equity upside in 2026, it seems wiser than ever to be widely diversified across sectors, styles and geographies, as Alliance Witan aims to achieve for its investors. Alliance Witan stock picker Metropolis finishes by summing this up:

“Diversification adds value because it helps to reduce the impact from inevitable mistakes caused either by faulty analysis or simply by turns of events which were entirely unpredictable (nobody forecasted Covid!). In reducing volatility, it is also supportive of a calm, long-term investor mindset.”