After strong performance in 2025, equity market dynamics have shifted in 2026 so far. Dorothée Deck, Head of Cross Asset Strategy at Barclays Private Bank, explores what’s changed and the potential implications for charity investors.
Global equities extended their rally in 2025, fuelled by the extraordinary momentum around artificial intelligence (AI), with the US market reaching new highs. Optimism about a productivity revolution, falling inflation and resilient growth supported sentiment, while expectations of interest rate cuts boosted risk appetite.
Beneath the surface, however, market leadership narrowed sharply and valuations became stretched. By year-end, a small group of AI-related mega caps accounted for a record share of global market capitalisation. In essence, 2025 rewarded concentration over diversification, a dynamic that rarely proves sustainable, particularly for charities seeking long-term stable returns.
Shifting market dynamics in 2026
Equity markets have entered 2026 with renewed momentum, but the tone is very different. Through late 2025 and into January, a more meaningful and convincing broadening has emerged across stocks, sectors and regions. This marks a key evolution in the equity cycle ‒ one that makes the rally more balanced and potentially more sustainable.
There are several drivers behind this broadening trend:
- After three years of extreme concentration, expectations for broader earnings improvement ‒ particularly in Europe, the UK, emerging markets and small-cap US companies ‒ have firmed.
- The extreme valuation gaps between mega caps and the rest of the market in 2025 have created fertile ground for a re-rating in previously overlooked areas. Investors are increasingly willing to pay for diversified earnings streams rather than narrow thematic exposure.
- Interest rate volatility has declined, supporting sectors and regions that struggled during the rapid tightening cycle. Financials, cyclicals and small caps have been prominent beneficiaries.
- Finally, investors entered 2026 underweight many of the areas that have recently strengthened. As clearer signs of improving performance emerged across these segments, money started to flow back in ‒ reinforcing the trend.
Even as breadth improves, markets remain psychologically divided, experiencing a tug-of-war between the fear of missing out (FOMO) and fear itself. Trustees may worry that sitting on the sidelines could mean missing out on returns. At the same time, several risks remain prominent, including geopolitical tensions, fiscal slippage in major economies, threats to central bank independence and questions over how the AI boom may evolve. This tension is likely to remain a defining feature of market behaviour, contributing to high dispersion and periodic spikes in volatility which charities will need to navigate carefully – particularly those with high dependence on portfolio returns.
Portfolio implications
With returns now coming from a broader mix of stocks, sectors and geographies, diversification is once again a source of return, not just a risk management tool. Charity investors should ensure appropriate portfolio diversification to avoid overreliance on a narrow group of winners. This may involve diversifying beyond US mega caps to opportunities in the UK, Europe and select emerging markets that combine more attractive valuations with improving fundamentals.
Despite improving breadth, dispersion is still elevated. Company-specific fundamentals ‒ earnings quality, pricing power, balance sheet strength ‒ are increasingly important. This environment rewards disciplined security selection and should favour active managers, who can target specific opportunities and avoid the more overvalued areas of the market.
Quality stocks are another area that could be due for a rebound. Defined as companies with strong balance sheets, consistent earnings and a high return on equity, quality as a style has historically delivered superior risk-adjusted returns across market cycles. After lagging during the AI-led rally, quality stocks are well positioned to regain leadership as volatility rises and fundamentals regain focus.
The balance between opportunity (broadening) and risk (geopolitics, policy uncertainty and pockets of high valuations) also supports the use of hedging strategies to help protect portfolios without sacrificing upside participation.
Looking ahead
Charity investors face a more balanced and selective environment, one that rewards discipline over momentum. The AI ‘supercycle’ is evolving, shifting from investing in the few to investing through the many. In short, 2026 is a year for rebalancing – positioning portfolios for a more sustainable phase of the cycle. However, any changes should be made in the context of a charity’s long-term investment goals and risk appetite. As ever, open and regular communication with investment managers can help charities to understand their options and build a long-term portfolio strategy that’s right for them and supports their mission for years to come.
For more investment insights from Barclays Private Bank, read the latest edition of Market Perspectives.
Please note: This article does not constitute advice or any form of investment recommendation. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority (Financial Services Register No.122702) and is a member of the London Stock Exchange and Aquis. Registered in England. Registered No.1026167. Registered Office: 1 Churchill Place, London E14 5HP.