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 — and 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, in the politics of industrial policy — and yet 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 — of 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, now 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. That is not a nuance. It is a structural feature.

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. 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.

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.

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, up sharply year-on-year. Much of that spending is aimed directly at AI infrastructure: GPUs, data centres measured in gigawatts, and the networking fabric required to turn hardware into competitive advantage.

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.

Even within the US, investors are becoming more selective. The “free pass” for spending is narrowing. Where operating earnings strain is visible and payback is unclear, the market is beginning to price the risk of overbuild. A spending boom can look like industrial genius until it resembles misallocation. The difference is usually only obvious after the cycle turns.

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. Deficits remain large, and projections point towards a steadily rising public debt burden in the decade ahead.

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. The question is no longer whether the US can finance itself, but what the price of that financing becomes.

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 — particularly because Europe’s index composition aligns with the new political economy. Financials, industrials, and materials sit closer to the centre of Europe’s equity complex than they do in the United States. Those sectors are the plumbing of a world that has rediscovered security, infrastructure, and resilience.

Valuation has been a large part of the story. Entering 2026, measures such as price-to-fair-value suggested European equities remained cheaper than their US counterparts, even after a strong rally into late 2025. The attraction is not simply that Europe looks inexpensive, but that it has catalysts with fiscal fingerprints.

Germany’s evolving stance is emblematic. For years, the debt brake and a political culture built around fiscal restraint limited public investment. Geopolitics has changed that. The demands of energy security, industrial competitiveness, and military deterrence have pushed Berlin towards a more permissive interpretation of fiscal policy, including discussion of large-scale multi-year funds for infrastructure and defence. Defence spending, once treated as a reputational liability by parts of the ESG world, is being reframed as a prerequisite for sovereignty.

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. The consequence is straightforward: a lower cost of capital for a market that still trades at a discount can change the valuation regime, not by magic, but by mathematics.

When safety diversifies: Bunds, Treasuries, and the new hierarchy

The rebalancing is visible in fixed income, where the old assumption — that Treasuries are the universal risk-free anchor — has begun to face competition. During episodes of trade policy uncertainty and tariff shocks, the behaviour of safe-haven assets has looked less uniform than investors have grown accustomed to.

German Bunds, once treated as a secondary haven, have regained appeal for global investors seeking euro liquidity with a different fiscal profile. The attraction is not that Europe is free of political risk, but that the supply dynamics and credibility calculus differ. Even with more spending, Germany’s debt burden remains far lower than that of the United States, and Bund markets can carry a “convenience premium” that reflects scarcity, institutional demand, and the perceived reliability of the issuer.

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. Pressure from the Tokyo Stock Exchange for companies to improve capital efficiency — including explicit scrutiny of firms trading below book value — has begun to change corporate behaviour. It is not glamorous reform. It is the kind that shows up in dividends, buybacks, and balance-sheet discipline.

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. That domestic bid matters, because it changes the character of the rally. Foreign capital can be impatient; corporate capital is often stickier, and it sets a floor under valuations in a way that tourist flows rarely do.

The macro backdrop has also altered. Japan’s long deflationary mindset has weakened, policy has normalised, and a modest reflationary environment has allowed companies to exercise pricing power more confidently than at any point in a generation. Wages have risen, consumption has improved, and domestic-demand exposure has become more credible. Japan begins to look less like a value trap and more like a market where governance reform and macro normalisation reinforce one another.

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 connector economies: where supply chains are being rebuilt

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: connector economies that offer geopolitical optionality, cost advantages, and improving industrial capacity.

Vietnam has emerged as a prime beneficiary in Southeast Asia. FDI inflows have remained robust, and the composition has tilted towards higher-value manufacturing, including electronics. The story is no longer only about garments and assembly lines; it is about industrial clusters, supplier ecosystems, and a gradual move up the value chain.

Mexico’s role is different but equally strategic. Proximity to the United States, reinforced by USMCA, makes it a natural node in a nearshoring world. Mexico has already overtaken China as the United States’ largest trading partner, and the pull of North American supply chain integration continues to deepen. The opportunity is significant, even as investors remain alert to policy uncertainty and security constraints.

India occupies yet another category. It is absorbing manufacturing capacity, but it is also making a statement about autonomy — not through slogans, but through balance-sheet choices. Reductions in Treasury holdings alongside increased gold accumulation speak to a broader reserve-management logic: reduce exposure to sanction risk and currency volatility, build resilience, retain optionality. India is not one story; it is several layered together: domestic demand, manufacturing export potential, and geopolitical hedging.

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, turning what used to look like a legacy holding into a strategic asset. The motivation is pragmatic. Sovereign debt is someone else’s liability. Gold is an asset with no counterparty. In an era where sanctions can freeze reserves and geopolitics can rewrite rules, that distinction has become newly salient.

Gold has also behaved in ways that suggest a regime shift. The old relationship with real rates has weakened at times, implying that gold is being treated less as a speculative trade and more as a neutral reserve asset. This does not dethrone Treasuries. It does, however, widen the defensive toolkit. Safety is being diversified.

Stewardship with teeth: when ownership becomes an allocation choice

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. After sustained engagement with Eni on climate strategy, the Danish pension fund opted to divest and to say so publicly, arguing that certain strategies are incompatible with Paris-aligned objectives. The point was not simply to leave; it was to signal risk, raise scrutiny, and make capital more expensive for companies deemed unwilling to adapt.

The logic extends to managers. AkademikerPension’s decision to terminate a mandate with State Street Global Advisors, citing dissatisfaction with its approach to active ownership and responsible investment, underlines 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 where the Great Rebalancing becomes more than geography. Capital is not only moving across regions. It is moving across philosophies — towards approaches that can navigate dispersion, manage trade-offs, and act with intention rather than inherit exposure by default.

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.