The AI Rally Is Broadening as Investors Hunt for the Market's Next Leaders
The AI trade hasn't overstayed its welcome yet, but it's starting to invite new guests. US stock funds posted a 17.1% total return in Q2 2026, their best quarter since 2020. Now, interest is increasingly spreading across a broader set of sectors.
Running the show: Investors poured a net $103.1B into U.S. stock funds in Q2, reversing $23.7B of outflows in Q1. Baird strategist Ross Mayfield argues the rally is being driven by earnings growth and abundant liquidity rather than speculation, giving the bull market a solid foundation. If those two pillars remain intact, he believes the advance could extend through the second half of 2026 and into 2027.
- The S&P 500 posted its strongest quarter in six years, with JPMorgan lifting its year-end target to 7.8K and analysts forecasting another 21% upside over the next 12 months.
- Small- and mid-cap stocks led in Q2, while semiconductors posted a record quarter — though Mayfield warned that “parabolic charts rarely correct sideways.”
The Broadening Rotation
Nvidia, Broadcom, and Micron now account for roughly 12% of the S&P 500, while tech and communication services make up nearly 50% of the index. That concentration is pushing strategists toward diversification. Schwab Asset Management CEO Omar Aguilar favors industrials, healthcare, materials, and small- and mid-cap stocks, arguing they are at the beginning of benefiting from AI.
- Consumer staples and healthcare trade at 19x and 18x forward earnings vs. 21x for the S&P 500, making them relatively inexpensive compared with the broader market.
- Guggenheim upgraded ServiceNow and Salesforce, arguing that fears have become overdone, with Salesforce trading at just 3.7x forward EV/revenue.
The next wave: Morgan Stanley Wealth Management CIO Lisa Shalett recommends a bond barbell of Treasuries and investment-grade corporates to hedge against both an inflation shock and a recessionary selloff. Mayfield remains optimistic, noting, "It's a bull market driven by earnings and liquidity, and those are the kind of things that can keep this going into the 2nd half of the year, and probably, in my opinion, into 2027 as well." The megacap AI trade still has believers, but the smartest portfolios are beginning to cast a wider net.
