The Great Rebalancing: Capital Allocation in an Age of Fragmentation and Convergence

After a long stretch in which US markets served as the default setting for global portfolios, 2026 is beginning to look like a turning point. Concentration risk, stretched valuations, fiscal strain, and a rewiring of supply chains and reserves are pushing capital towards a wider, more contested map of opportunity, alongside a more complicated definition of safety.

For almost two decades, the United States has supplied the world with a simple investment story: own the index, ride the innovation premium, let the dollar do the rest. It was a story reinforced by earnings, liquidity, and the gravitational pull of a handful of technology firms that became, in effect, the equity market’s operating system.

In early 2026, that narrative is not collapsing so much as fraying at the edges. The global economy is fragmenting in trade, in security, in reserve management, and in the politics of industrial policy. Capital is responding in a way that produces a paradoxical form of convergence. Money is dispersing. The world is not becoming one market; it is becoming many markets that matter.

This is the Great Rebalancing, a shift away from an era of concentration, with capital parked on the high ground of the S&P 500, towards a more multipolar landscape. Europe offers value with catalysts. Japan is unlocking balance-sheet potential that has sat dormant for a generation. Connector economies are absorbing the physical footprint of “China plus one”. Central banks are quietly rethinking what it means to hold a reserve asset. Even the old distinction between “developed” and “emerging” is losing some of its explanatory force. In 2026, the more useful question is simpler: where is capital treated best?

Exceptionalism as a Concentrated Trade

The United States remains the world’s deepest pool of liquidity and the centre of gravity for global risk assets. The problem, for allocators, is that the benchmark has become more brittle even as it looks more powerful. The S&P 500 still carries the aura of diversification, but its construction tells a different story. By the end of 2025, the ten largest companies accounted for roughly 41 percent of the index’s market capitalisation, according to RBC Wealth Management.

Concentration, on its own, is not an indictment; leadership is a recurring feature of bull markets. The concern is the way leadership has detached from fundamentals. Estimates suggest the top ten now represent around 41 percent of index weight while contributing closer to 32 percent of projected earnings for 2026, a mismatch also discussed in Guinness Global Investors’ analysis of rising concentration risk. That gap is the market’s hope premium made visible, the extra valuation investors are willing to pay for a future that has not yet been earned.

Passive investing is where this becomes consequential. Index exposure is no longer a broad wager on the American economy; it is a narrow wager on the durability of a small set of business models. In prior decades, a broad basket could absorb an earnings wobble in any one sector. In 2026, the index has less ballast. If the leadership stumbles, the whole ship lists.

The comparison with earlier episodes of concentration is instructive. The Dot-com period was heavy with companies that had ambition but not profits. Today’s leaders are demonstrably profitable. Yet profitability is not the same as valuation immunity, particularly when the price paid for each unit of earnings begins to resemble a historical outlier, a theme echoed by Apollo Academy’s review of extreme index concentration.

Valuation with Little Margin for Error

The most chilling signal is not a single earnings miss, but the arithmetic of starting valuations. The cyclically adjusted price-to-earnings ratio hovered near 40 in January 2026, a level reached only in two prior moments that now live in market folklore: the late 1920s and the peak of the Dot-com bubble in 2000. One recent mainstream illustration of this historical comparison is set out in The Motley Fool’s discussion of extreme CAPE readings.

A high multiple does not trigger a crash on a timetable. What it does, reliably, is reduce the market’s tolerance for disappointment. With yields normalised, the risk premium embedded in equities no longer looks inexhaustible. When cash and high-quality bonds pay something again, equity valuations must work harder to justify themselves. At these levels, even a modest gap between expectation and delivery can produce a violent repricing, because perfection has been paid for in advance.

This is the quiet psychological shift of 2026. Investors do not need to believe the US is “finished” to rotate. They only need to believe that the asymmetry has changed: more downside per unit of upside, less diversification than advertised, and a narrower set of outcomes that produce acceptable returns.

The AI Buildout: Miracle, Moats, or Misallocation?

Nothing concentrates the current regime more than artificial intelligence. The AI story is not simply a narrative; it is a capital cycle, and one of unprecedented scale. Projections for 2026 place combined capital expenditure by the largest hyperscalers at roughly $602bn, as tracked in CreditSights’ hyperscaler capex estimates. Goldman Sachs has separately argued that the final number could exceed consensus as spending plans continue to expand, in its note on why AI companies may invest more than $500bn in 2026.

The market has tolerated this buildout because it sees strategic necessity. In cloud computing, the logic is defensive as well as ambitious: spend to protect the moat, because if you hesitate, someone else will build the capacity and capture the platform effects. That dynamic can be rational, even elegant. It can also become a trap if spending runs ahead of monetisation.

This is where 2026 becomes a stress test. The question is not whether AI is transformative, it almost certainly is, but whether cash flows arrive quickly enough to justify depreciation cycles and rising capital intensity. Hardware ages fast. Expectations, once inflated, can deflate faster. In a market built on a small group of leaders, the AI capex cycle is not a sector story; it is the index story. The debt-financed dimension of this buildout has also attracted attention in commentary such as Introl’s review of the AI infrastructure debt wave.

The Sovereign Balance Sheet in the Background

Behind the corporate ledger sits the state. The US fiscal trajectory is no longer a footnote to the exceptionalism trade; it is part of the risk calculus. Official projections of deficits and debt dynamics are set out in the Congressional Budget Office’s outlook for the budget and the economy, with additional tracking and context provided by the Bipartisan Policy Center’s deficit tracker.

For markets, this matters in two ways. The first is mechanical: funding chronic deficits requires persistent Treasury issuance, which can keep long-term yields supported even when the central bank eases. The second is psychological: a reserve currency depends on confidence that its issuer can finance itself without steadily eroding the value of the claim. The dollar remains dominant, but in a world of political volatility and sanctions risk, reserve managers are increasingly open to diversification.

None of this implies capital abandons the United States. It implies the default allocation begins to look crowded, and the opportunity cost of ignoring the rest of the world begins to rise.

Europe’s Repricing: Value, Security, and a Fiscal Turning Point

If the US has offered growth at a premium, Europe has often offered cyclicality at a discount. In 2026, that discount is starting to look less like stagnation and more like mispricing. Morningstar has argued that European equities entered this period undervalued versus fair value estimates, in its assessment of whether now is a good time to buy European stocks.

The attraction is not simply that Europe looks inexpensive, but that it has catalysts with fiscal fingerprints. A notable shift is Germany’s evolving stance on investment and fiscal flexibility, discussed in strategy commentary such as BNP Paribas Wealth Management’s Fixed Income Focus and broader market outlook work including BlackRock’s equity market outlook.

Monetary policy has reinforced the case. With inflation moderating more quickly in parts of the Eurozone than in the United States, the European Central Bank has had room to take a more supportive posture. State Street Global Advisors has examined how this divergence has fed into relative performance, in its note on why European equities have outperformed amid low growth and security concerns.

When Safety Diversifies

The rebalancing is visible in fixed income, where the old assumption that Treasuries are the universal risk-free anchor has begun to face competition. The BIS has analysed changing safe-haven properties and associated portfolio flows in its Quarterly Review article on Treasuries and global investor flows.

German Bunds, once treated as a secondary haven, have regained appeal for global investors seeking euro liquidity with a different fiscal profile. DWS has made the case for renewed Bund appeal in its CIO View, while a Federal Reserve Bank of San Francisco paper has explored the “safety premium” embedded in German inflation-linked bonds in German Inflation-Linked Bonds: Overpriced, yet Undervalued.

This is how a multipolar world expresses itself in markets: not through dramatic displacements, but through gradual shifts in correlation and preference. The global definition of “risk-free” is not dissolving; it is fragmenting.

Japan’s Quiet Revolution in Capital Discipline

Japan’s renaissance has been described as cyclical before, only to disappoint investors who mistook optimism for reform. In 2026, the more compelling story is structural. The Japan Exchange Group has documented its push for management that is conscious of cost of capital and stock price in its “Action to Implement Management…” initiative. Neuberger Berman has also framed the macro environment as a shift away from the old liquidity trap in its Japanese equities outlook.

One of the most meaningful shifts is the source of demand. Japanese corporates have become major net buyers of domestic equities, using buybacks to shrink bloated balance sheets and lift return metrics. Daiwa has discussed this domestic bid and expectations for a new era in its market outlook note.

In a world where investors want Asian exposure without an equivalent dose of geopolitical uncertainty, Japan’s combination of liquidity, rule of law, and reform momentum looks increasingly like a core allocation rather than a tactical deviation. The political overlay has been examined by State Street Global Advisors in its discussion of policy tailwinds and market dynamics.

The Connector Economies

The Great Rebalancing is not only about portfolios; it is about factories. “China plus one” has moved from boardroom rhetoric to capex decisions, and that shift is producing winners that sit between blocs. McKinsey has mapped the opportunity set in its work on diversifying global supply chains in Southeast Asia.

Vietnam has emerged as a prime beneficiary in Southeast Asia. Vietnam Briefing has compiled 2025 FDI and trade dynamics in Vietnam’s Economy in 2025, while Savills has broken down manufacturing FDI in its H1 2025 analysis.

Mexico’s role is different but equally strategic. The US State Department’s Investment Climate Statement for Mexico sets out the framework shaping nearshoring, with complementary context on foreign investment provided by Santander Trade and trade and tariff dynamics explored by BBVA Research.

India occupies yet another category. It is absorbing manufacturing capacity, but it is also making a statement about autonomy through reserve choices. The shift in India’s Treasury holdings and gold accumulation has been reported in The Times of India’s coverage of de-dollarisation signals.

Gold and the Politics of Reserves

When central banks change behaviour, it is rarely a fashion. In recent years, the official sector has purchased more than 1,000 tonnes of gold annually, a trend explored by WisdomTree’s analysis of who is buying gold and why. Visual Capitalist has also highlighted how gold’s share of reserves has risen in some comparisons, in its summary of central bank reserve trends.

Gold has also behaved in ways that suggest a regime shift. J.P. Morgan has discussed the outlook for gold prices and key drivers in its global commodities research. This does not dethrone Treasuries. It does, however, widen the defensive toolkit. Safety is being diversified.

Stewardship with Teeth

The shift away from passive dominance has a moral dimension as well as a mechanical one. Concentration risk is pushing investors towards selection, but stewardship is pushing them towards conviction. Responsible ownership in 2026 is less about polite engagement and more about credibility, consequences, and cost of capital.

AkademikerPension captures the change in tone. The fund’s voting priorities are outlined in its published voting policy and priorities. After sustained engagement with Eni, AkademikerPension opted to divest and to state its rationale publicly in its announcement on divestment of upstream oil and gas majors, with further commentary on the dilemma of divestment covered by Net Zero Investor.

The logic extends to managers. AkademikerPension’s decision to terminate a mandate with State Street Global Advisors was reported by European Pensions, underlining a broader trend: asset owners are beginning to treat stewardship as a procurement standard, not a marketing line. In a world where long-term liabilities include climate risk, governance risk, and geopolitical risk, “ownership” is returning to its literal meaning.

This is also where the AI cycle collides with climate ambition. The tension between the energy demands of AI infrastructure and transition goals has been explored in a recent CFI.co analysis of the AI–energy nexus, a reminder that stock selection increasingly contains embedded policy choices.

The New Weight of the World

The United States remains indispensable. But in 2026 it looks less like the only market that matters and more like the most crowded expression of a single theme. Concentration has reduced diversification. Valuations have reduced margin for error. The AI buildout has raised the stakes. Fiscal dynamics have introduced a long shadow in the background.

Elsewhere, the opportunity set looks broader. Europe offers a valuation discount paired with fiscal and strategic catalysts. Japan offers reform momentum translating into capital returns. Connector economies are gaining industrial significance as supply chains decentralise. The defensive architecture of portfolios is changing, as Bunds, gold, and alternative safe havens regain relevance in a world where “risk-free” has become political.

That is what a fragmented world looks like in capital markets: not disorder, but dispersion. The Great Rebalancing is not a slogan. It is the practical work of building portfolios for a world in which the benchmark is no longer a destination, and safety no longer has a single address.