For ETF investors, the bigger question is less โwhether to own equitiesโ and more how to avoid an unintentional style bet. A market led by a narrow set of large growth companies can make broad equity exposure look diversified when it is still highly concentrated. That matters for portfolios that rely on index funds as core holdings, because the risk is not only market direction, but also factor crowding and leadership reversal.
Small-cap exposure can serve a different portfolio role than simply chasing a cheaper valuation multiple. Smaller companies often carry different balance-sheet and financing characteristics, so their sensitivity to policy expectations can diverge from mega-cap names. For long-term allocators, that creates a useful rebalancing tool: adding exposure when one segment has lagged can help restore balance across size, style and earnings drivers rather than letting recent winners dominate the mix.
The policy backdrop also affects how investors should think about growth and value sleeves. When rate expectations are fluid, equity styles can respond unevenly even if overall earnings remain healthy. That argues for using diversified equity ETFs with clear index rules and transparent sector weights, instead of assuming all โU.S. stocksโ will react the same way to inflation, rates or geopolitical headlines.
In practice, the long-term takeaway is discipline. Periodic rebalancing, attention to concentration, and an explicit split between core market exposure and satellite style tilts can matter more than trying to forecast the next short-term leadership shift. For investors building portfolio resilience, the decision is not only which equities to own, but how much style risk to let the market decide for them.
Key Takeaways
- The equity bull market is expected to continue through the second half of 2026, supported by resilient U.S. growth, AI investment and solid earnings.
- With the Federal Reserve expected to stay on hold, resilient earnings could continue supporting U.S. Growth stocks despite lingering inflation pressures.
- U.S. small caps look attractive thanks to compelling valuations, easing rate expectations and diversification beyond today’s mega cap leaders.
We believe the bull market will continue through the second half of 2026.
Our recently published H2 2026 Economic and Market Outlook,ย What the New ‘Warsh’ Cycle Means for Markets, is summarized below.
Macroeconomy
- The U.S. economy is on strong, stable footing, with data volatility (especially in oil dynamics) reflecting temporary, exogenous interruptions rather than long-term, structural disruptions.
- We anticipate continued economic growth in the second half, fueled by AI capital spending. Street consensus earnings growth for this year and next is ambitious but doable.
- With oil erasing most of its war-driven gains, we expect soft inflation prints this summer. However, inflation remains structurally higher than the Fedโs longstanding 2% target; collapsing energy prices may only provide partial relief.
Monetary Policy
- The Kevin Warsh-led Fed will challenge the policymaking and communication status quo. Forward guidance will be significantly reduced, while the Fed may start consulting different data sources in its monetary policy operations.
- Given the rolling nature of oilโs war-induced volatility, along with the overall health of the U.S. economy, we don’t see a strong case for meaningful federal funds policy action. We expect the Fed to remain firmly on hold for the remainder of 2026, confounding the consensus expectation of one or two quarter-point hikes between now and yearend.
Geopolitics
- The conflict with Iran appears to have peaked in Q2. While intermittent flare-ups are likely, the geopolitical risk to equities has abated, allowing markets to refocus on tariffs, China, and AI. The pivot from โheadline risk-to-bottom line riskโ is something investors should welcome.
Equities
Most of our stock market views have not changed materially over the last half year. The biggest is stocks versus bonds. Our Models team continues to overweight equities.
We recently upgraded Growth in U.S. equities. We would characterize that as neutral within the broader Growth-versus-Value framework. Our regional bias is toward the U.S. relative to developed and emerging markets. Weโre also bullish small caps over large caps.
Our upgrade to Growth rests on earnings resilience, which we think is thematic for the next several quarters. In short, both Growth and Value will see earnings leap in 2026 and 2027, owing to the lagged effect of outgoing Fed Chairman Jay Powellโs monetary easing campaigns of 2024 and 2025. The magnitude and extent of the pop in Growth stocksโ earnings should enable the group to grow into its valuation.
We expect U.S. corporate earnings to continue outpacing non-U.S. peers, some of whom may be more hamstrung by further Iran flare-ups than the energy-independent United States.
Lastly, because small caps tend to have more floating-rate debt than large caps, we believe small caps stand to benefit as the market reduces its expectations for one or two quarter-point rate hikes over the remainder of the year. Additionally, we argue that the group trades at a compellingly cheap valuation, a multiple reminiscent of its differential relative to large caps that preceded seven subsequent years of outperformance from 1974โ1981. Small capsโ relative valuation is also akin to the differentials witnessed before they embarked on their legendary 2000โ2017 besting of large caps. If nothing else, small cap exposure may be a hedge to a market that has become mega-cap growth-dominated.
While volatility may increase under a more data-dependent Federal Reserve and a fluid geopolitical landscape, we view pullbacks as distractions, rather than reasons to abandon risk assets altogether. Investors who remain disciplined should be well positioned to navigate the second half of 2026 and beyond.
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