After a powerful six-month rally that lifted the S&P 500 by 35% from its Liberation Day low, momentum in global equities shows few signs of fading. What began as a technology-led advance — driven by record-breaking investment in artificial intelligence (AI) — is now broadening to include cyclical sectors, signaling renewed confidence in the durability of the U.S. economic expansion.

According to Seema Shah, Chief Global Strategist at Principal Asset Management, history suggests that equities tend to perform strongly when the Federal Reserve cuts interest rates outside of a recessionary period. “Despite some lingering risks, today’s mix of policy easing and transformative AI investment sets a constructive outlook for 2026,” she said, highlighting that the current environment mirrors other non-recessionary easing cycles that produced sustained equity gains.

A Broader Market Advance

While the initial phase of the rally was concentrated in mega-cap technology stocks, particularly those at the forefront of AI innovation, participation is now widening. Sectors such as consumer discretionary, industrials, and financials are seeing renewed investor interest, while the Russell 2000 — a benchmark for small-cap U.S. stocks — has outperformed the S&P 500 since April.

This rotation reflects improving sentiment around corporate earnings, with investors anticipating a more balanced and durable economic expansion heading into 2026. “The fact that cyclicals are now participating is a healthy sign,” analysts noted. “It suggests investors are no longer relying solely on AI narratives but are positioning for a broader recovery in corporate profits.”

Policy Easing as a Key Catalyst

The Federal Reserve’s pivot toward monetary easing has provided crucial support. Historically, equity markets have posted strong average returns in the two years following the start of non-recessionary rate-cutting cycles. This pattern appears to be repeating, as investors respond positively to both improving liquidity conditions and lower discount rates applied to future earnings.

Although recent labor market data has softened, other economic indicators — including services activity and household spending — remain resilient. This points to a scenario of modest economic slowing rather than a full-blown recession.

Risks Still on the Horizon

However, risks remain. A sharper deterioration in the labor market could dampen consumer demand and earnings momentum, while renewed fiscal stress or persistent deficits could push long-term bond yields higher, weighing on valuations. Geopolitical uncertainty and election-year policy shifts also add an element of volatility.

Even so, analysts believe the combination of supportive monetary policy, a deregulatory policy stance, enhanced tax incentives, and continued AI-driven capital expenditure provides a powerful foundation for risk assets heading into 2026.

Outlook: Constructive but Selective

The outlook for the next 12 to 18 months remains constructive, with markets benefiting from synchronized policy tailwinds and expanding earnings visibility. Yet, with valuations elevated, investors are advised to remain selective — focusing on companies with strong cash flow visibility, exposure to AI and automation, and those positioned to benefit from cyclical recovery themes.

“Equities still have room to run,” Shah concluded. “We’re entering a phase where growth is slower but more sustainable — and that’s a positive setup for diversified portfolios into 2026.”

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