Position beyond US large-cap tech for the next wave of AI and economic realignment
As equity market leadership broadens and becomes more sensitive to shifts in capital investment and policy, concentration risk is rising. Positioning beyond US large-cap technology and toward companies tied to capital investment and economic activity can help diversify sources of return in this changing market environment.
Over the past decade, equity market leadership has been driven by the primary beneficiaries of globalization. US large-cap technology and growth companies have delivered strong earnings, resilient profitability, and globally scalable growth—fueling outsized returns for investors.
While these fundamentals remain intact, the increasing concentration of leadership has become a vulnerability, leaving the market more exposed to shifts in growth, capital investment, and policy.
Skepticism began to build in October over whether AI hyperscalers could generate adequate returns on their massive capital expenditures. Combined with the outbreak of war in the Middle East at the end of February, this triggered a noticeable rotation in stock market leadership.
Through April, US small caps outperformed large caps, international developed and emerging markets surpassed US large caps, and the Energy, Industrials, and Materials sectors all outpaced both the Technology sector and the broader market.1
This backdrop points to a more fragmented market environment that favors companies tied to capital investment, industrial activity, and the buildout of physical infrastructure.
The next phase of the bull market may reward breadth over concentration. And that has clear implications for portfolio construction. Diversification may need to become more intentional—built around the deglobalization regime rather than traditional distinctions like geography, market capitalization, or style.
In practice, that means moving beyond a narrow set of large-cap technology leaders to a broader opportunity set tied to investment, production, and economic realignment—while avoiding concentration risk disguised as diversification. Investors may consider:
- Technologies tied to AI infrastructure and deployment
- Defense stocks supported by rising global security priorities and sustained government spending
- US small caps with greater exposure to domestic economic activity and capital investment
- Emerging market equities positioned to benefit from global growth, supply chain realignment, and favorable valuations
Innovation is shifting toward infrastructure and deployment
Resilience, security, and self-sufficiency have become greater priorities as the global economy shifts from an era of globalization to one defined by deglobalization.
In this environment, transformative technology accelerators—AI infrastructure, blockchain, semiconductors, automation, cybersecurity, defense technology, and energy innovation—are emerging as core drivers of the next cycle of productivity and industrial expansion as governments and corporations prioritize domestic manufacturing, supply chain resilience, and technological leadership.
These segments sit at the intersection of structural growth, national strategic priorities, and rising productivity and are well positioned to benefit across a range of economic and geopolitical environments.
Innovation has become both an economic and geopolitical imperative, reinforcing demand for these technologies.
Robust cloud and AI infrastructure revenues fueled S&P 500 earnings in the first quarter, while Technology and Communication Services sectors saw an elevated share of companies beating estimates as investment in disruptive technologies remained strong.2
AI and semiconductor companies are leading earnings growth, while Microsoft, Meta, Alphabet, and Amazon are projecting record levels of AI-related capital investment.3
For investors, participating fully in AI-driven growth may require looking beyond traditional technology sectors and mega-cap names to the broader ecosystem supporting innovation—where demand is tied more closely to real economic activity.
Security spending is becoming a structural driver of growth
National security and economic security have become increasingly intertwined as the world has shifted from globalization toward deglobalization. Governments across the globe are boosting defense spending to protect supply chains, secure critical infrastructure, and respond to rising geopolitical tensions.
Global defense spending is at record highs.
- Global military spending reached a record $2.9 trillion in 2025, marking the 11th consecutive year of increases and a 41% increase over the last decade4
- In its largest rearmament since the Cold War, European spending surged 14% in 2025, the fastest pace in decades. Germany increased spending by 24%; Spain by 50%5
- NATO spending expectations are rising, with members under pressure to spend at least 2% of GDP on defense and discussions toward a potential 5% commitment6
In the US, President Trump submitted a proposal to Congress requesting a historic $1.5 trillion defense budget for the 2027 fiscal year.7 The proposal is aimed at modernizing the military, bolstering a national "Golden Dome" missile shield, and supporting the ongoing war effort in Iran.
Supply chains and weapons inventories need rebuilding. The wars in Ukraine and the Middle East revealed how depleted Western weapons inventories have become. Governments are now prioritizing domestic manufacturing, ammunition stockpile rebuilding, missile production expansion, and supply-chain reshoring.
That backdrop creates a durable tailwind for defense companies, many of which may benefit from long-term government contracts, strong cash flows, and growing demand for advanced technologies including cybersecurity, aerospace, AI, and autonomous systems.
Defense stocks have historically performed well during periods of geopolitical fragmentation, when rising tensions, trade conflict, and increased government spending support demand.
For investors, defense stocks offer exposure to the structural realignment of global priorities, supported by strong earnings visibility, sustained fiscal spending, and rising demand for security and resilience.
Domestic exposure is gaining importance in a fragmented economy
After years of lagging large-cap stocks, US small caps may be well positioned to benefit from the next phase of the market cycle. In an environment defined by deglobalization, reshoring, and increased domestic investment, smaller US companies stand to gain from strengthening capital spending, infrastructure investment, and a renewed focus on American manufacturing and supply chains.
Many small-cap companies generate the majority of their revenues domestically, making them less exposed to global trade tensions and currency volatility than multinational large caps.
This domestic orientation also positions small caps to benefit more directly from US infrastructure spending, manufacturing reshoring, defense outlays, and broader capital investment tied to industrial policy and AI buildouts. Potential Federal Reserve easing could provide additional tailwinds.
Small caps remain historically cheap relative to large caps despite improving fundamentals. The S&P 600 trades at 14.9x forward earnings, versus 22.6x for the S&P 500—a discount of about 35%.8 When valuation gaps have become this extreme, small caps have tended to outperform over the following three to five years.9
Beyond the attractive valuations, first quarter earnings growth came in at about 12% year-over-year on revenue growth of 5.4%. The revenue growth figure is the best since the second quarter of 2022 and it aligns well with economic growth.10 Analyst earnings and revenue revision ratios are also trending higher, driven by higher commodity and oil prices.
For investors, US small caps may offer an opportunity to participate in a more diversified and domestically driven economic expansion.
Global growth leadership is becoming more diffuse
As the global economy transitions from globalization to a more fragmented and regionalized landscape, emerging markets are becoming increasingly important drivers of global growth and supply chain diversification.
Countries across Asia, Latin America, and parts of Eastern Europe are benefiting from shifting trade patterns, manufacturing realignment, and rising domestic consumption. Many have also entered this period with stronger balance sheets, improved fiscal discipline, and more attractive valuations relative to developed markets.
Emerging markets continue to grow notably faster than developed economies. The International Monetary Fund expects emerging economies to grow by roughly 4% in 2026, compared to about 1.5-2% for many developed economies. Emerging economies now account for about 42% of global GDP and continue to gain share of global economic activity.11 This growth dynamic supports corporate earnings, consumer demand, and infrastructure investment.
Emerging markets also play a central role in the AI supply chain. Many investors mistakenly associate AI entirely with US mega-cap technology companies, but critical AI infrastructure is heavily concentrated in Taiwan and China.
More broadly, emerging markets are also benefiting from supply chain diversification, industrial policy, and China+1 manufacturing strategies, with opportunities emerging across India, Mexico, and Indonesia.
Stronger fundamentals are reinforcing this shift. Many emerging economies now have stronger balance sheets than developed markets. Emerging-market sovereign debt-to-GDP ratios are more than one-third lower than developed economies on average.12
Structural tailwinds add further support. Favorable demographic trends—including younger populations, expanding labor forces, and rising middle classes—provide additional long-term support.
Finally, the US dollar backdrop is becoming more favorable to emerging markets allocations. A weaker dollar can reduce debt pressure for emerging market countries, improve capital flows, boost commodity prices, and support local currencies and equity returns.
Despite recent outperformance, emerging market valuations still trade at a substantial discount to developed markets. Some market watchers suggest that emerging market stocks trade at a 45% discount to developed market stocks on a price-to-earnings basis.13 Yet, corporate earnings are forecast to grow 1.5x faster in emerging markets than in developed markets this year,14 rising by about 18%.15
Driven by domestic reforms, country-specific policy changes, local consumption trends, and regional supply chains, emerging markets may offer better diversification today than in the past.
For investors, emerging markets offer exposure to faster-growing economies, expanding middle classes, and critical industries tied to the future of global commerce, including semiconductors, commodities, digital infrastructure, and advanced manufacturing.
Regardless of all the good emerging market news, investor positioning remains light. Emerging market stocks are under-owned, under-allocated, and less crowded than US mega-cap technology. Historically, some of the strongest emerging market performance periods began when sentiment was cautious, valuations were discounted, and capital allocations were low.
For investors, as global leadership broadens, emerging markets may provide both diversification and exposure to the next phase of global growth.
Positioning for the next phase of market leadership
As market leadership broadens, investors may need to look beyond a narrow group of mega-cap winners and toward a wider set of companies tied to capital investment, production, and economic realignment.
In this environment, diversification is less about spreading risk across traditional asset classes and more about gaining exposure to the drivers of capital investment and industrial activity that are reshaping global growth.
Implementation Ideas
To position for the AI trend and the global economic realignment, consider:
Gain exposure to companies tied to AI infrastructure and deployment
Access defense stocks positioning to benefit from global security priorities
US small caps with exposure to domestic economic activity
Focus on emerging markets that may benefit from global growth and supply chain realignment
