The top-heavy nature of US equities continues to shape market sentiment, with the 10 largest companies now accounting for roughly 40% of the S&P 500’s total market value. While such concentration has sparked comparisons to past bubbles, analysts note that dominant cycles in sectors like finance and energy have historically persisted for decades without triggering systemic crises.
Tech valuations have surged on the back of strong investor demand for AI-related growth, but strategists argue the rally is still supported by fundamentals — including robust balance sheets and earnings strength — rather than speculation. The key risk, they say, lies in potential earnings disappointments that could test the durability of returns. Investors are increasingly favouring companies with high gross margins, strong cash reserves and stable end markets.
Beyond the megacap names, opportunities may be emerging in small and mid-cap “enablers” — firms providing essential tools and infrastructure for the AI buildout. However, as AI-driven capital expenditure relies more on borrowing, analysts warn that rising leverage levels will require close attention in 2026.
Meanwhile, recent bankruptcies have sharpened the focus on US banks’ exposure to Non-Deposit Financial Institutions (NDFIs). The seven largest banks hold nearly $360 billion in private equity and private credit loans, about 11% of their total lending portfolios. While the failures have raised concerns about credit quality and financial interconnectedness, experts view these issues as isolated rather than signs of broader systemic stress. Corporate credit metrics remain resilient, pointing to a mid-cycle environment. Still, the events underscore the need for rigorous underwriting and disciplined credit selection.
Geopolitical risks also remain elevated. Despite moves toward de-escalation in the Middle East, tensions between Russia and Ukraine persist, with incidents such as drone incursions into Poland underscoring the potential for broader spillover.
Looking ahead, the 2026 US midterm elections, ongoing White House pressure on the Federal Reserve and the upcoming decision on a new Fed Chair are expected to influence market volatility, rates and the dollar as investors navigate an increasingly complex global landscape.
