As the AI rally matures, strategists from BlackRock, J.P. Morgan, and Morgan Stanley are calling for a shift to active value hunting in 2026.
While U.S. stocks hit record highs in late 2025, the easy “beta” trade is fading. The new year will be defined by stock picking and sector rotation rather than broad index riding.
🗺️ THE 2026 ASSET ALLOCATION PLAYBOOK:
1️⃣ Small Caps (The Comeback Kid):
- Thesis: Lower borrowing costs (2 expected Fed cuts) + rebounding earnings growth.
- Target: Jefferies expects the Russell 2000 to hit 2,825 (+14% gain).
- Lazard View: “We finally are seeing earnings growth come back into small caps.”
2️⃣ Gold (The $5,000 Call):
- Forecast: J.P. Morgan and BofA see Gold hitting $5,000/oz (vs $4,314 in 2025).
- Driver: Central bank diversification away from the Dollar and persistent geopolitical hedging.
3️⃣ Sector Rotation (Healthcare & Financials):
- Healthcare: Weight-loss drugs (GLP-1s) continue to drive industry growth.
- Financials: Deregulation + AI efficiency = Mid-cap bank opportunities. M&A acceleration is expected to boost deal fees.
4️⃣ Currencies (Dollar Weakness):
- Short USD: Fed cuts and a cooling labor market will weigh on the Greenback.
- Long EM: Brazil Real and Chinese Yuan look attractive.
- Commodity FX: AUD and NZD set to benefit from improving global growth.
5️⃣ The “Wildcard” Asset: Event Contracts
- Trend: Prediction markets are entering a “supercycle,” with revenues projected to jump 5x by 2030 (Citizens Financial).
- Players: Robinhood and Coinbase are battling for dominance in this burgeoning $2B revenue sector.
💡 ANALYST TAKEAWAY: The consensus is clear: 2026 is the year of Diversification. The “Magnificent 7” trade is crowded; the alpha is now in Small Caps, Gold, and specific Emerging Markets. With high-yield issuance up 17% and M&A returning, the market is broadening out.
👇 Portfolio Managers: Are you rotating into Small Caps early, or waiting for the first Fed cut to confirm the trend?