Beyond AI: Policy clarity, consumer challenges and broader participation in 2026

U.S. equity performance in 2025 did not disappoint, particularly since it followed the back-to-back double-digit returns of 2023 and 2024. Three straight years of performance at these levels should have us all standing up to take notice.

It goes without saying, but this impressive showing has been powered chiefly by technology and AI-related stocks. There’s a great deal of enthusiasm around innovation, but we’re aware that investors are increasingly asking whether this is still indicative of durable growth or turning into a speculative bubble.

We believe 2026 will be a year of reassessment. There are several key trends that we see coming into focus in the coming year: leadership may broaden to include a wider group of stocks, valuations must either justify themselves or normalize, and diversification will likely regain importance.

Is AI a bubble, or the backbone of productivity gains?

The tension around AI-enabling stocks boils down to two questions: has the excitement about AI opportunities pushed valuations too far, or are we constructing the foundation of a multi-year productivity cycle?

We offer a few observations in pursuit of an answer:

• Today’s AI capex wave—that is, the amount of money that AI-enabling companies have been investing in the development and buildout of AI technology and infrastructure—has been huge. We need an all-in measure of the economy to arrive at the appropriate scale, and AI capex represented over two-thirds of U.S. annualized GDP growth during the first half of 2025.¹
• This scale of investment creates obvious parallels to the telecom buildout of the late 1990s, but today’s leading companies are larger, more profitable and better capitalized.
• Still, circular financing—where LLM developers, chipmakers, cloud providers and AI infrastructure companies are simultaneously suppliers, customers and financers of one another—creates interdependencies that intensify the concentration risks.

Stretched valuations contrast with strong fundamentals

The high valuations and capex of leading AI enablers can be rationalized by their profitability and balance sheet strength, separating this period from classic bubble environments, in our view. We also see the merits of the AI productivity theme and understand that it may unfold unevenly over the coming years as different aspects of the infrastructure buildout rush to keep pace with deployment.

Today, we believe cautiousness is warranted given the high degree of market dependence on the AI theme, which can be observed in terms of the contribution to earnings growth and market share of AI leaders. Fortunately, while earnings growth has been coming down for the Magnificent 7—it has also been accelerating for the rest of the market, which we consider a crucial sign of healthy corporate fundamentals. Moreover, investors can actively manage exposures simply by rebalancing to reset some of the unintended market-driven portfolio changes that can be created by a long bull market.

Exhibit 1: Earnings growth has accelerated across the market

Quarterly data from January 1, 2015 to June 30, 2027. Gray area represents net income estimates beginning October 1, 2025 provided by UBS. Big 6 includes Alphabet, Amazon, Apple, Meta, Microsoft and Nvidia. Sources: Standard & Poor’s, Refinitiv, FactSet, UBS

A word of caution, however: the importance of the AI market narrative has created a “halo effect” that has boosted lower-quality and more speculative stocks based on their perceived proximity to the theme. These lower-tier stocks have been volatile, and they’ve fallen harder during selloffs in 2025 than the tech leaders.

Concern arises from the possibility that such strong leadership can mask potential weakness in these lower-tier stocks. If credit concerns arise, the strong balance sheets of the Big 6—that’s the Magnificent 7 minus Tesla—should provide them with greater stability, but we wouldn’t expect lower-quality halo stocks to have the same degree of insulation.

Profitability and the policy factor

Tariffs and policy uncertainty were widely expected to be impediments for corporate profit margins in early-to-mid 2025, particularly for the industrial and consumer sectors. The reality has been much better, with corporations neither passing on the bulk of tariff costs nor succumbing to significant margin pressure.

Exhibit 2: Maintenance of profit margins expected to give way to expansion

Quarterly data from July 1, 2024 to March 31, 2026 with estimates beginning October 1, 2025. Source: Bloomberg

It’s entirely possible that rising capex and persistent inflationary costs could compress profits in 2026 even if revenues hold up, however, so we’ll need to look beyond those sectors most directly impacted by tariffs for indications of deteriorating profitability.

Credit and the consumer lens

We’ve focused on the economic implications of the K-shaped economy—that is, the divergence between upper- and lower-income Americans—and creeping affordability issues for Americans on the lower side of the income and wealth spectrum. Housing affordability has been acute and we’re seeing rising auto loan delinquencies, which could be an early indicator of deteriorating credit conditions, though it’s too early to raise alarm.

The intersection between consumer pressures and the U.S. stock market runs through the consumer sectors, particularly for certain discretionary companies but also for staples. The credit picture is healthy enough that we aren’t concerned about the impact on financials.

Easing policy rates by the Federal Reserve and the potential for declining longer-term rates can be expected to support housing affordability and lending conditions, but credit quality and rising delinquencies should temper optimism on the consumer outlook. We nevertheless see the potential for a boon in lending activity that could be expected to benefit financials if rates continue to come down in 2026.

Diversification remains an essential opportunity

The extreme concentration of the market in mega-cap tech has made diversification both challenging and essential. It’s complicated by the fact that even stocks that are inexpensive compared to the average aren’t necessarily cheap by historical standards.

Despite these pressures, we know there will likely be pockets of volatility during the year ahead. These may present opportunities to buy high-quality companies with durable earnings at better valuations than those available at market peaks.

We continue to pursue a “barbell” approach, balancing growth exposure—tech, communication services—with cyclical and value-oriented sectors like financials, industrials and healthcare. Dividend yielding stocks also have lagged in 2025, making them an undervalued, more defensive group in our barbell strategy.

Will concentration give way to broader participation?

Sustained equity market health requires broad participation across sectors and capitalization tiers. We saw intermittent stretches in 2025 when a broad cross-section of stocks participated in the prevailing direction of the U.S. market. Performance tends to follow earnings, so we believe broader participation will become more routine in 2026 as the earnings growth trends for mega-cap tech leaders and the rest of the market continue to converge.

We believe the risks remain balanced: high valuations suggest more moderate performance ahead, but fundamentals remain supportive. The key to navigating 2026 lies in recognizing both the potential of innovation-led growth and the opportunity in sectors that are catching up. As is so often the case, thoughtful diversification is once again the most practical strategy to balance these opportunities.

1. https://www.reuters.com/markets/europe/ai-clouds-up-economic-dashboard-2025-11-10/