There's More to Growth Than AI

For several years, investor focus has been predominantly on a limited number of AI-related and technology stocks. However, as liquidity conditions tighten and speculative activity diminishes, broader market fundamentals are regaining prominence. Richard Bernstein, Global Head of Macro & Customized Investing, observes that improving profit growth across various regions and sectors is creating new investment opportunities beyond the recent market leaders. Investors are adjusting their expectations regarding Federal Reserve rate cuts, leading to a reduction in the excess liquidity that has previously fueled speculative, momentum-driven markets. Profit growth is becoming more widespread, extending beyond the U.S., with positive earnings trends in international equities presenting a more compelling growth narrative. Market leadership is diversifying beyond the so-called Magnificent 7, as investors increasingly favor companies with improving fundamentals over those driven by hype and momentum.

Speculation continues to be a defining characteristic of current financial markets, with investors often conflating financial markets with prediction markets, despite their distinct economic purposes. Financial markets are designed for capital formation and real business investment, serving as the economic link between savings and investment. Prediction markets, conversely, exist solely for betting on outcomes with minimal economic value addition. Excess liquidity, primarily managed by the Federal Reserve, is the fuel for speculation. The potential for the Fed to raise interest rates to combat inflation could signal the end of the current speculative fervor, as the Fed may withdraw the abundant liquidity that has supported speculative trading. Early in 2026, it was anticipated that investor expectations for Fed rate cuts were overly optimistic, suggesting that liquidity would not be as plentiful as speculators had assumed. Evidence indicates that investors have revised their year-end 2025 Fed forecasts, beginning to price in a scenario of diminishing liquidity.

Historical analysis spanning over three decades reveals that market rotations—shifts between growth and value, large and small caps, or high and low quality stocks—are fundamentally driven by profit cycles and valuation fundamentals. When markets disregard these fundamentals, it is typically due to excess liquidity fostering speculation, where momentum and relative strength become the primary performance drivers over profits and valuation. While the resilience of the U.S. economy and its surprising nominal growth in 2026 have been noted, the concurrent strengthening and broadening of profit growth across more companies, both domestically and internationally, has received less attention. Forecasts for profit cycles in major regions indicate that while U.S. profit growth may be nearing a peak, non-U.S. cycles appear to be accelerating, suggesting a convergence in profit growth rates between the U.S. and international markets. For years, the primary argument for investing in non-U.S. stocks was their undervaluation, but a lack of a strong growth story limited their outperformance. Currently, non-U.S. markets are offering growth that is increasingly competitive with the U.S., a trend reflected in their performance in 2026 due to improved profitability. Contrary to the notion that the U.S. is the sole market for long-term profit growth, analysis of the ACWI Index reveals that long-term growth opportunities exceeding 25% are available across various global stocks, with only one of the Magnificent 7 stocks included in this high-growth group.