Equities in Focus

The Tale of the Tape 

(Display 1) is a recap and assessment of our views throughout the year, where we note those that either stayed or strayed (with one toss-up in the May post) of what we expected to occur and why.

Notables Warranting a Closer Look 

Considering our business is a humbling one, let’s first rip the Band-Aid off and drill down on two viewpoints that broke from our expectations, namely sector and factor leadership. The middle column of (Display 2) shows that while traditionally defensive sectors such as healthcare and consumer staples got out of the gate strong earlier in the year, ultimately a Yogi Berra factor, “It’s déjà vu all over again” took hold and technology and communication-services sectors regained top-performers status. This transpired not only from the sustained AI trade, but the expectations of Fed rate cuts and tariff fears proving to be more bark than bite allowed the market to re-embrace a risk-on tone.

Turning to more formal factors, while beta lagged the dividend-centric counterparts during a good portion of November, it also reasserted itself as a star given the reasons mentioned above pertaining to sector performance (Display 3).

Conversely, the markets have thankfully posted strong returns since our March letter, where we mentioned that investors typically celebrate a reduction in policy uncertainty (Display 4). Additionally, the Magnificent Seven have remained the “Divergent Seven” year to date, given many of these stocks have lagged the S&P 500 Index versus being strong outperformers the prior two years (Display 5).

Our Views for 2026

Investors are grappling with a scarcity of growth, a scarcity of capital and a scarcity of certainty. While valuations are rich versus history, a favorable offset is healthy earnings growth, and we suggest the following strategy guidelines for next year:

Seek active approaches to curb volatility. Questions on the duration of US exceptionalism and AI dynamics could provoke turmoil in 2026. The mega caps will face heightened scrutiny and AI-related disappointments may prompt equity declines. Consider adding defensive equity strategies to your allocation, which include those focusing on dividend growth.

Cast a wider net for long-term return potential. This year reminded us that diversification is not dead—witness international stock returns versus US equities. For investors who have been overweight US stocks, consider expanding toward non-US markets, where the revival of value stocks offers diversification to popular US growth allocations. We also encourage rebalancing toward less-loved areas such as value and small caps.

Double down on quality. Short-term lapses in quality stock performance don’t necessarily signal a fundamental erosion of long-term potential. Our research suggests that quality companies with consistent profitability and resilient business models tend to outperform over time. In our view, earnings and cash flows are still the best predictors of equity returns over long time horizons.

We appreciate your support and partnership, and wish you a joyous holiday season and a prosperous 2026!

To learn more about AB’s equity investment solutions and to access other market insights, visit Equity Investments | AB