US growth stocks underperformed in early 2026 amid AI disruption fears and an unresolved conflict in the Middle East. But these stresses could create favorable conditions for selective, diversified investors to unlock long-term growth potential in a rotating market.
Equity market dynamics have been shifting rapidly this year. First, a sell-off in software stocks over AI concerns and the underperformance of the Magnificent Seven mega-caps prompted a rotation toward value equities and defensive sectors. Then, equities fell sharply in March on the Iran war and oil price shock, and rebounded in April amid a fragile ceasefire. US growth stocks lagged value stocks in the first quarter, but reasserted leadership through mid-May on strong earnings and continued AI related capital spending.
Many investors in active growth strategies have experienced volatile performance in these markets. Yet, despite the bumpy ride, we think there are three good reasons to maintain active exposure to growth stocks.
1. Market concentration creates both risk and opportunity. The large-cap growth market is in the grip of a historic concentration cycle that has buoyed passive portfolios while making it extremely difficult for diversified active managers to outperform. The 10 largest holdings in the Russell 1000 Growth Index now account for more than 60% of the benchmark, versus 42% at the peak of the dot-com era in 1999. Back then, the top stocks spanned the aerospace, retail and technology industries. By contrast, concentration today is overwhelmingly tech-centric and closely tied to the AI narrative.
That distinction matters. We think concentration is a key risk for passive investors today not just because of the index weights themselves—but because of the narrow set of earnings, sentiment and capital-spending expectations driving them.
At the same time, concentration also creates opportunity for active portfolios. With valuations stretched in some AI-adjacent corners of the market and growing pressure for profitability to justify extraordinary capital expenditure, we think the concentrating trend could at least pause—and possibly reverse for some current leaders. We saw hints of that dynamic in early 2025 and again in early 2026, and our research suggests that active managers perform well in broadening markets.
Of course, nobody can predict when a reversal might materialize. But we think some degree of broadening is inevitable as competition rises and AI-driven disruption reshapes profit pools across industries. That doesn’t mean we expect a broad equity sell-off; equities rose from 2001 to 2007 when markets broadened after the dot-com bubble burst. In fact, AI reinforces our optimism. If the technology delivers on its promise and adoption spreads, productivity gains and cost savings will filter through to a much broader set of companies—much as the internet eventually did. If AI disappoints or simply fails to meet today’s ambitious timeline embedded in prices, the market’s current winners could lag, paving the way to relative outperformance elsewhere.
2. Profitable-growth companies offer resilience. Quality businesses, backed by strong profitability, are a time-tested recipe for growth investing success. That’s why the profitability equity factor has outperformed market-driven factors such as momentum and beta for a quarter century (Display).
