Advisers Urged to Shift From U.S. Tech to EM and Small Caps

At a midyear 2026 briefing, Research Affiliates and PIMCO urged investors to broaden holdings beyond U.S. mega-cap technology, naming small-cap stocks, emerging markets and real assets as alternatives. The session was moderated by Brent Leadbetter and featured Research Affiliates CIO Jim Masturzo and PIMCO Executive Vice President Justin Belsy.

Panelists pointed to a shift in market leadership over the past year. The Russell 2000 rose more than 40% over the prior 12 months. Emerging markets outperformed several developed peers. REITs moved from a long-term average near 5% to double-digit returns in the last year. By contrast, the S&P 500 produced about a 15% annualized return over the previous decade, driven largely by a small group of mega-cap technology firms.

Masturzo said recent inflation spikes reflect supply shocks rather than excess consumer demand, citing geopolitical conflict and energy price moves as key drivers. He argued that traditional rate hikes are less effective when inflation is driven by supply constraints. Belsy described recent inflation as heavily linked to surging energy costs, and he noted energy trends have begun to ease.

The panel highlighted labor market details that complicate policy decisions. Headline unemployment has remained near 4%, but falling labor force participation and negative real wage growth point to weaker underlying conditions, Masturzo noted, and should be part of policymakers’ assessments alongside the jobless rate.

Valuation measures were a central concern. Research Affiliates identified elevated Shiller CAPE ratios in the U.S. and in markets associated with the artificial intelligence trade. Masturzo said the U.S. CAPE was above 40 and close to the tech bubble peak of 44. Leadbetter reported Shiller CAPE readings of about 45 in Korea and roughly 52 in Taiwan, levels higher than the U.S. peak in March 2000.

On portfolio construction, the speakers recommended wider diversification. Masturzo cited local-currency emerging market bonds as attractive on the basis of higher real yields and, on average, lower inflation rates in many emerging markets compared with current U.S. levels. Belsy recommended including real assets, inflation-protected securities and non-U.S. exposures in long-term allocations, and referenced a multi-asset strategy that mixes equities, bonds, real assets and inflation hedges as an example.

The discussion covered longer-term forces that could push inflation in either direction. Panelists listed deflationary influences such as wider AI adoption, aging populations and rising sovereign debt, and inflationary pressures including larger fiscal deficits, nearshoring of supply chains and recurring commodity supply disruptions. They said the combination of these forces is likely to increase inflation volatility.

Participants advised considering uncorrelated sources of return as market concentration and valuation risk increase. They identified expanding exposure to small caps, emerging markets, commodities, REITs and inflation-protected securities as potential responses to the trends discussed at the midyear briefing.