Active Equity Update: Takeaways Entering 2026
2025 remained a difficult environment for many traditional active equity strategies, as markets continued to be narrow and benchmark-driven. In recent research, the Endowment’s investment consultant NEPC noted that fundamentally driven and quality-oriented managers have faced persistent headwinds, though these approaches could meaningfully improve if market sentiment and breadth shift.
A major driver of equity market performance has been the continued acceleration of the artificial intelligence (AI) theme – see chart below. While valuations appear stretched, NEPC emphasized that AI-driven mega-cap companies have been among the largest contributors to earnings growth and overall market returns—creating a clear risk for investors who are significantly underweight these names in the near term.
Looking forward, NEPC pointed to “green shoots” in U.S. small caps and improved performance in non-U.S. equities and emerging markets—areas where investor sentiment has been strained in recent years, but where improving fundamentals and a potentially more favorable rate environment could create opportunity.
