From rally to rebalance – the need for diversification in 2026

AFTER an unexpectedly strong 2025, investors have entered 2026 optimistically. This sentiment has grown further as global markets staged a sharp rally into the first trading days of the new year, with major indices across the US, Europe and Asia all advancing further.

However, beneath the headlines of US strength and mega-cap technology leadership, a quieter but more significant development has begun to unfold: Market leadership is broadening. Europe has kept pace with the US in dollar terms and Asia even outperformed.

For more than a decade, the US has generated outsized returns versus the rest of the world, but such dominance tends to come in cycles. The valuation premium attached to US equities today – visible across multiple sectors – is increasingly difficult to justify.

When one strips out the most concentrated cohort of US winners, earnings growth across regions looks far more alike than valuations imply.

Many investors assume that markets outside the US offer fewer compelling opportunities, but this is simply not the case. The global value chain enabling artificial intelligence (AI) – such as chip manufacturing, data storage, testing equipment and hardware infrastructure – is overwhelmingly centred in Asia and Europe.

Meanwhile, we observe corporate governance reforms across key Asian markets, from South Korea’s Value-Up programme to improvements in corporate governance and shareholder returns in China and Singapore. These trends create fertile ground to look beyond the most crowded trades.

We are also seeing opportunities in areas where fundamentals are depressed, but industry structure is improving. Global truck manufacturing and US paper and packaging are two such examples.

These are sectors where valuations remain low, supply discipline is returning, and earnings have yet to reflect the structural changes under way. These are the types of industries that reward patient, bottom-up research.

In the US, AI remains a powerful theme, but markets have heavily concentrated on the most obvious beneficiaries. Valuations in these areas now embed unusually ambitious expectations for returns on the capital expenditure and uninterrupted demand.

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History suggests that these assumptions may be too optimistic. Efficiency gains, early-cycle overordering and the slower adoption of AI all pose the risk that earnings may not meet market expectations.

At the same time, new entrants – from hyperscalers to frontier-model developers – means that supply is expanding in what looks like an increasingly commoditised market for large language models.

Currencies will also matter in 2026. A softer US dollar, which consensus expects, historically supports emerging markets and non-US assets. Combined with more reasonable valuations abroad, this tilts the balance of opportunities further towards Europe and Asia.

Many of the world’s most dominant companies – leaders in payments, travel technology, memory, foundry capacity, industrial automation and hardware supply chains – sit outside the US, and continue to deliver strong fundamentals at comparatively modest valuations.

Amid the current backdrop of high valuations, geopolitical noise and shifting macro signals, resilience is even more paramount and can come from three places: being unconstrained in idea generation; maintaining strict valuation discipline; and prioritising companies with strong balance sheets, predictable cash flows and management teams aligned with minority shareholders.

Even excellent companies can be poor investments when bought at the wrong price. With markets near highs, that discipline matters more than ever.

Income strategies, meanwhile, will play an increasingly valuable role this year. Dividends have historically contributed around half of total equity returns and tend to grow ahead of inflation.

Today, income is not simply about chasing high yields; it is about finding sustainable, growing dividends without compromising on quality.

One way to enhance yield is through tools such as covered calls, allowing one to maintain exposure to high-quality compounders while still delivering attractive income outcomes. This avoids the need to rely on cyclical or rate-sensitive sectors that can quickly unwind when macro conditions shift.

In 2026, it is more important than ever for investors to broaden their lens beyond the most crowded parts of the US market. They would be wise to focus on quality, valuation and income – three pillars that can help portfolios remain resilient in uncertain times.

For investors willing to look beyond the familiar, the opportunity set today is far richer than headlines suggest.

The writer is portfolio manager, Fidelity International