by Joseph V. Amato, President and Chief Investment Officer—Equities, Neuberger Berman
January was an especially long and politically noisy month due to a blur of headline-making events around Venezuela, Greenland, Iran, the U.S. Federal Reserve, chaos in Minneapolis and more.
The months and quarters ahead are unlikely to be much different, setting up 2026 to be a challenging and more geopolitically chaotic year than 2025.
Navigating this will be difficult, requiring focus and discipline. Yet, away from the political maelstrom, the underlying macro and market backdrop has remained remarkably strong and steady: U.S. and global growth are resilient (if not accelerating), as underlined by the Fed’s decision last week to pause its rate cuts on a stronger economic outlook; earnings expectations have improved, and risk assets continue to perform, shrugging off notable political events.
This is especially the case in equities, where major indices continue to hit fresh highs, driven increasingly by the earnings strength and outlook of a broader set of stocks—a development we have frequently highlighted and anticipated since the beginning of last year.
For investors, that combination of solid fundamentals and widening equity leadership argues less for abrupt portfolio shifts and more for recommitting to core principles: stay invested, stay diversified and ensure exposure to the segments now driving—and likely to continue driving as the rotation gets under way—the market’s advance, including small caps, value and select opportunities outside the U.S.
Participating in the Broadening Out
We are already seeing this breadth in the pattern of returns. As the domination of global equity markets by a small group of mega-cap growth and AI-related stocks fades for now, smaller companies, value sectors and non-U.S. markets have begun to show meaningful outperformance versus large-cap U.S. indices over recent months, and the gap in returns year-to-date has become too large to dismiss.
The Russell 2000 Index of small-cap stocks is, for instance, up 6.5% in the year to January 29 compared to 3.9% for the Russell 1000 Value Index and 1.3% for the S&P 500 Index. What’s more, the MSCI ACWI ex-U.S. Index is up 6.7% and the MSCI Emerging Markets Index has gained 11% in the same period, representing a month of extraordinary outperformance, especially versus most of the “Magnificent 7” stocks.
Just as importantly, the composition of leadership within the S&P 500 has also shifted over the last three months. Since October 29, 2025, the materials sector (+14.9%), energy (+13.3%), consumer staples (+8.5%), health care (+8.0%) and industrials (+6.5%) are all up more than 5%. Only two of the 11 top-level sectors are down over that period: utilities (-3.6%) and information technology (-5.4%).
Clearly a shift is under way, from a market priced around a handful of names to one where more sectors, styles and regions are contributing meaningfully to equity returns.
A New Regime?
A key question is whether this development is sustainable. In our view, there are good reasons why it is.
Most importantly, the fundamental backdrop supports this shift. The global economy is expanding at a pace that is strong enough to sustain rising corporate revenues and profits. In the U.S., growth has remained resilient and looks set to strengthen helped by a mix of fiscal support and prior rate cuts, still-supportive financial conditions and a corporate sector that has spent the last cycle strengthening balance sheets. What’s more, the nomination of former Fed governor Kevin Warsh—an experienced and credible central banker—as chair Powell’s successor only adds to the supportive backdrop and removes a major market uncertainty, in our view.
Earnings are telling a similar story of improvement. Aggregate profit forecasts across major indices point to another year of solid gains, with all major sectors expected to deliver positive earnings growth and several projected to post double-digit advances.
Indeed, many of the areas now benefiting from the rotation, including small caps and select non-U.S. markets, come from a starting point of relative neglect. In several cases, price-to-earnings multiples remain close to their own long-term averages and at a discount to U.S. large caps. That combination—better earnings momentum and more reasonable valuations—is a powerful one over a multiyear horizon.
None of this means the rotation will be smooth or without bumps along the way. Flows into and out of passive vehicles and factor-based strategies can amplify short-term moves. Leadership can reverse for months or quarters at a time. But underneath that day-to-day volatility, the direction of travel—toward broader participation—is gathering momentum and becoming more pronounced.
Resist Temptation—Stay Involved
What, then, should investors do? First, resist the temptation to step aside during periods of geopolitical-led volatility. Timing markets around political drama, central bank meetings or one-off news events has rarely been a reliable route to long-term returns. With earnings advancing and equity leadership widening, the bigger risk is to be underinvested just as more parts of the equity universe start contributing.
Second, reconsider existing equity exposures. The last cycle rewarded highly concentrated allocations to a small number of mega-cap growth names. The next phase may look different. A more balanced mix across styles, market caps and regions is, in our view, better suited to a world of broader leadership and ongoing rotation. This is not about abandoning quality or chasing every cyclical bounce, but about ensuring portfolios are not anchored exclusively to the outperformers of the past.
Finally, keep the focus on fundamentals rather than the news cycle. Fresh U.S. government shutdown scares, tariff rulings, geopolitical flare-ups and monetary policy dynamics will continue to generate volatility. Some of these events will matter; many will not. Earnings power and valuation will matter across the cycle. The ability to hold that distinction in mind—to distinguish between signal and noise—is likely to be a key driver of future investment outcomes.
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