If 2025 was the year markets rewarded concentration, 2026 is shaping up to be the year they punish it. That, at least, is the essential argument running through BlackRock's Q2 2026 Equity Market Outlook1, a sweeping assessment authored by some of the firm's most senior voices across fundamental and systematic investing.
"If 2025 was a year of mega caps and momentum," write Global CIO Carrie King and Global Head of Systematic Raffaele Savi in their foreword, "2026 begins with refrains of reversal, rotation and recalibration." It is a thesis that threads through every chapter of the report — and the evidence they marshal in its support is both granular and, at times, counterintuitive.
The AI Reckoning
The starting point is artificial intelligence, and specifically the market's evolving relationship with it. For three years, broad exposure to the AI theme was effectively a sufficient investment strategy. The so-called Magnificent 7 stocks returned 222% from 2023 through 2025, while the remaining 493 constituents of the S&P 500 returned 52%. The index became, in King's words, "ultra-concentrated" — a "growthier" construct that diluted core and value exposure while crowding momentum-chasing investors into the same narrow positions.
That dynamic is now cracking. Co-CIO Jeff Shen and Dynamic Factor Rotation lead Philip Hodges note that within the AI ecosystem, investors are no longer treating the theme as uniformly positive. Instead, harder questions are being asked: who captures revenue and who absorbs the cost of generating it? How durable are margins as competition intensifies? Which business models are most exposed to disruption?
The report is careful to distinguish this recalibration from a fundamental deterioration. "Recent AI-related volatility reflects a recalibration in market focus rather than a weakening in underlying company fundamentals," the authors write. What is changing is the locus of opportunity. Where the first phase of AI investment scaled primarily through software and code, the current phase scales through capital — infrastructure, power, cooling, compute. As bottlenecks migrate across the AI stack, leadership is extending to additional layers of the value chain, often at more attractive valuations than the original beneficiaries commanded.
King reinforces this framing in the U.S. broadening section: "The AI mega force is unmatched in its might, igniting large and lasting shifts in the long-term profitability outlook across economies." But crucially, she adds, "AI is also showing signs of recalibration as the opportunity set broadens beyond the prevailing leaders." For investors, that expansion means more doors to walk through — in healthcare imaging and diagnostics, in drug discovery, in sectors that have historically had nothing to do with semiconductors.
The Broadening U.S. Market
King dedicates significant attention to what she calls "the makings of a broader U.S. stock market" — a rotation that is visible in real-time data even if its durability remains debated. The equal-weighted S&P 500 is outperforming its market-cap-weighted counterpart through February, a meaningful signal given that the top 10 stocks in the cap-weighted index represented nearly 40% of the index at year-end 2025, more than double their 19% share at the end of 2010.
The sector leadership has also inverted. Energy and materials — 2025's laggards — are the year's top performers, while technology and communications services, which led from 2023 through 2025, have retreated. King is transparent about the drivers: some of the rotation is sentiment-based, including the February software selloff triggered by AI disruption fears and geopolitical events lifting oil prices. But she argues markets are anticipatory: "some of the rotation may reflect investor expectations of broadening fundamental strength."
Three areas emerge as her primary candidates for benefiting from that broadening. Value stocks, trading at a 43% discount to the market against a historical median of 19%, represent what the report describes as a significant re-rating opportunity simply to return to long-term norms. Dividend yield, currently the top-performing factor year-to-date, carries similar characteristics and could become more attractive still as lower rates make equity income competitive with fixed income. And AI beyond the obvious — particularly healthcare, where adoption in imaging, diagnostics, and documentation is already meaningful — rounds out her conviction list.
"We expect market broadening to come not in large swaths," King writes, "but in a growing number of interesting pockets across sectors and industries."
Factor Discipline in a Rotating World
The systematic perspective offered by Shen and Hodges adds important texture to King's fundamental analysis. In a market defined by rotation, they argue, the cyclicality of style factors — value, growth, momentum, quality, low volatility, size — provides a useful navigational framework.
Their core finding is counterintuitive but historically robust: value tends to outperform growth precisely when growth is abundant. BlackRock's data, covering U.S. large-cap equities from 2000 to 2026, shows a value factor information ratio of 0.86 during accelerating growth regimes — compared to -0.34 in stable growth and -1.29 in deteriorating growth. In a market where earnings are broadening and investors are placing greater weight on cost discipline and competitive durability, that historical pattern argues for tilting toward value over growth.
Momentum remains relevant, but its composition is evolving. Its adaptability — the ability to capture improving fundamentals beyond traditional growth sectors — means it continues to complement rather than compete with value. Quality's outlook is more nuanced: in a capital-abundant environment, balance sheet strength alone is insufficient. Execution and capital allocation discipline matter more. And geopolitical tensions add a layer of complexity that makes nimble, balanced portfolio management not just desirable but essential.
"Gaining an edge in fast-moving markets," Shen and Hodges write, "requires anticipating change rather than reacting to it." Their proposed tool is systematic analysis of earnings calls, management commentary, broker reports, and policy developments — signals that surface well before they appear in prices or financial results.
A Global Hunt for Value
International CIO Helen Jewell leads the report's global chapter, and her message is that after a year of impressive gains, bargains are scarcer — but not absent. Her tour identifies three distinct geographies worth attention.
European defense has surged roughly 350% over three years, driven first by the Ukraine war and then by NATO spending commitments. Yet on a price-to-earnings-to-growth basis, European defense valuations remain far below U.S. peers, which sit at long-term highs. European banks, after gaining nearly 300% over five years, still trade below their long-term average price-to-earnings ratio and look undervalued relative to U.S. and Japanese counterparts.
In the UK, the FTSE 100 reached record highs at the start of 2026 — achieved, notably, without big-tech or AI exposure — while trading at a meaningful discount to U.S. markets. UK small caps offer even more pronounced value relative to their 20-year history. Jewell sees potential Bank of England rate cuts as a possible catalyst, though she flags inflation risk.
In emerging markets, Brazil stands out. Despite broad EM valuations sitting roughly 17% above their 20-year average, Brazil trades at a 10% discount, with healthy PMI readings, interest rates at 20-year highs forecast to fall by as much as 300 basis points in 2026, and significant exposure to domestic retail and finance sectors that global investors have largely ignored.
Japan receives its own dedicated chapter — and arguably the report's most structurally compelling argument. The February general election, which installed a majority government under Prime Minister Sanae Takaichi, has added political momentum to what were already improving corporate fundamentals. The Bank of Japan is gradually normalizing rates while keeping real rates negative. Corporate governance reforms are reducing the share of TSE prime market companies trading below book value from 50% in 2022 to 29% today. And Japan's diversified sector composition — spanning industrials, financials, consumer goods, and healthcare — offers a structural hedge against AI-related volatility that the U.S. market cannot. "As Japan undergoes important transformations," Jewell and Rie Shigekawa write, "pro-growth government adds another layer of support for equities."
5 Key Takeaways for Advisors and Investors
- Broaden U.S. equity exposure beyond mega-cap growth.
The equal-weighted S&P 500 is outperforming the cap-weighted version, value stocks trade at a historically extreme 43% discount, and Magnificent 7 earnings growth is moderating while the rest of the index approaches double-digit growth for the first time in years. The structural case for broadening within U.S. equities is real and arguably underappreciated in most portfolios.
- Tilt toward value and dividend yield, not away from growth entirely.
BlackRock's systematic data shows value significantly outperforms growth during periods of accelerating growth — and that is the current regime. Dividend yield is the top factor year-to-date. Neither signal requires abandoning growth exposure, but both argue for rebalancing away from the extreme growth tilt that dominated 2023–2025 positioning.
- Stay engaged with AI, but demand more specificity.
The AI investment theme remains powerful, but the era of undifferentiated exposure being sufficient is over. Advisors should probe which companies in client portfolios capture AI revenue versus absorb AI costs, and consider whether healthcare, industrials, and infrastructure-adjacent names offer better-valued access to the theme than the original semiconductor and software leaders.
- Build genuine geographic diversification — Japan and UK deserve fresh attention.
Japan's combination of pro-growth government policy, corporate governance reform, and sectoral diversification makes it a structurally attractive allocation, not merely a tactical trade. The UK's discount to U.S. valuations, combined with FTSE 100 outperformance achieved without tech exposure, offers diversification characteristics that are difficult to replicate elsewhere in developed markets.
- Prepare portfolios for sustained volatility, not a return to calm.
BlackRock is explicit: "Bouts of volatility are all but assured amid high valuations, concentrated gains in AI-driven stocks, and elevated geopolitical uncertainties." Active management, factor diversification, and the flexibility to rotate across size, style, and geography are not optional enhancements — they are the core discipline that 2026's market environment will reward.
This article is based solely on BlackRock's Q2 2026 Equity Market Outlook (March 2026). It does not constitute investment advice. Capital is at risk. Past performance is not a reliable indicator of future results.
Footnote:
1 King, Carrie, and Raffaele Savi. Equity Market Outlook Q2 2026. BlackRock, Mar. 2026
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