Equity markets to broaden despite continued AI resilience

While the transformative impact of AI (artificial intelligence) continues to be a defining force, the contours of equity market leadership are shifting. In 2026, we anticipate broader market participation and a widening spectrum of opportunities—both within AI‑related sectors and across a diverse range of industries and regions.

Within AI, we have entered a period of “existential investment”—a phase in which major technology companies, or hyperscalers, must invest heavily to safeguard their long‑term value. These buildouts have so far largely been self-financed through strong cash flows, although debt financing is starting to play a bigger role. The rise of AI has transformed former monopolies into direct competitors, resulting in a more dynamic investment landscape.

AI leadership is shifting toward physical AI, the essential infrastructure powering the next wave of innovation across energy, cooling, networking, and semiconductors. While leading AI firms are likely to continue to outperform, dispersion is rising as product cycles diverge and competition heats up. The next chapter of AI leadership may favor semiconductor enablers, power infrastructure, and automation suppliers—where earnings potential remains underappreciated.

Broader participation to gain momentum

Concurrently, there is the potential for further market broadening beyond AI into other sectors and regions. In the U.S., the enactment of the One Big Beautiful Bill Act (OBBBA) in July is expected to add approximately USD 200–300 billion in stimulus planned for 2026. This fiscal thrust should provide a front‑loaded boost to economic activity and corporate earnings. The OBBBA’s emphasis on physical infrastructure, energy grids, roads, bridges, data centers, and industrial capacity should drive renewed breadth across sectors, notably industrials, materials, and energy.

Elsewhere, deregulation under the Trump administration and rising mergers and acquisitions (M&A) activity have been lifting U.S. banks’ returns on equity. We also believe bank regulation has peaked in Europe, where banks are already benefiting from higher rates and capital returns as economic activity increases from fiscal stimulus. As a result, banks in both the U.S. and Europe are likely to take on more lending, trading, and M&A activity, which would boost returns.

The outlook for the aerospace and defense sector remains strong, supported by a multiyear commercial aircraft production backlog, recovery in travel, and rising global defense spending. Less sensitive to rates and geopolitics, this sector benefits from fleet and supply chain modernization in aerospace, as well as advances in defense technology including AI‑powered surveillance, autonomous systems, and small modular reactors.

AI gains to spread across regions

Outside of the U.S., Japan stands out for attractive valuations, robust cash flow, and improved corporate governance. Positioned at the heart of global supply chains for semiconductors and robotics, Japanese firms are poised to benefit from the ongoing capex cycle.

Europe is quietly entering a new expansion phase. The suspension of Germany’s debt brake allows fiscal flexibility for defense and infrastructure. European industrial and automation franchises appear to be particularly well positioned to participate in the buildout of “physical AI” such as robots, autonomous systems, and drones.

China remains a tactical opportunity set. Regulatory attitudes have softened, with the government encouraging private enterprise. Domestic AI large language models like DeepSeek have spurred excitement for some Chinese platform companies. These companies are well positioned to benefit from AI‑driven advertising and cloud growth. However, structural headwinds, slower growth, and geopolitical uncertainty suggest that selectivity remains key in the region.

The outlook for ex‑China emerging market (EM) stocks also looks broadly positive. Supporting factors include favorable demographics, ongoing reforms in key markets such as India and Brazil, and increased global supply chain diversification amid ongoing trade tensions. Valuations are generally less stretched than in developed markets, which could attract incremental capital if sector rotation broadens market leadership. Commodity exporters in the Middle East and Latin America may gain if global growth picks up.

Equity’s “good ponds” no longer confined to tech

Overall, the market backdrop is complex, but the coming year is likely to bring broader participation. The AI cycle remains powerful, yet it is evolving; fiscal expansion, reindustrialization, and valuation gaps are opening multiple paths to growth.

Investors should balance exposure to enduring AI leaders with cyclical and international markets that stand to benefit from this broadening. The equity market’s “good ponds,” where growth and pricing power remain strong, are no longer confined to U.S. technology. They now encompass a wider range of sectors and regions, reflecting a more globally distributed opportunity set.

Key takeaway
Equity market leadership is broadening as AI gains spread across sectors and regions, while fiscal stimulus and reindustrialization are driving opportunities beyond U.S. tech.

 

 

Appendix

Financial Terms: Investors in the U.S. and Canada, for a glossary of financial terms, please go to troweprice.com/glossary.

Investment Risks:

Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each person’s investing situation and circumstances differ. Investors should take all considerations into account before investing.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries.

Commodities are subject to increased risks such as higher price volatility, geopolitical and other risks. Commodity prices can be subject to extreme volatility and significant price swings.

Inflation-Linked Bonds (Treasury Inflation Protected Securities in the U.S.): In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities (TIPS).

Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences.

Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path.

Financial services companies may be hurt when interest rates rise sharply and may be vulnerable to rapidly rising inflation. Health sciences firms are often dependent on government funding and regulation and are vulnerable to product liability lawsuits and competition from low-cost generic product.

The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a income-oriented stocks.

Small‑cap stocks have generally been more volatile in price than the large‑cap stocks. Investing in private companies involves greater risk than investing in stocks of established publicly traded companies. Risks include potential loss of capital, illiquidity, less available information and difficulty in valuating private companies. They are not suitable, nor available, for all investors.

All investments involve risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.

Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall. Investments in high‑yield bonds involve greater risk of price volatility, illiquidity, and default than higher‑rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Some or all alternative investments such as private credit, may not be suitable for certain investors. Alternative investments are typically speculative and involve a substantial degree of risk. In addition, the fees and expenses charged may be higher than the fees and expenses of other investment alternatives, which will reduce profits. As interest rates rise, bond prices generally fall. Investments in high yield bonds involve greater risk of price volatility, illiquidity, and default than higher rated debt securities.

T. Rowe Price cautions that economic estimates and forward‑looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual outcomes could differ materially from those anticipated in estimates and forward‑looking statements, and future results could differ materially from any historical performance. The information presented herein is shown for illustrative, informational purposes only. Any historical data used as a basis for this analysis are based on information gathered by T. Rowe Price and from third‑party sources and have not been independently verified. Forward‑looking statements speak only as of the date they are made, and T. Rowe Price assumes no duty to and does not undertake to update forward‑looking statements.