Broadening Equity Rally Fueled by Global Fundamentals and M&A

Key Quotes

"You know, the main worry is just, uh, the strength itself, right? Are we, have things been too good, and are we being set up for a disappointing 2026? I, I think expectation management matters, right? Obviously, we, we can't keep printing high teens, 20-plus [percent returns] year after year after year, and this would be the fourth year of gains if 2026 is positive. But in a bull market, that's not uncommon, and there are a lot of tailwinds for the market as we turn the page on 2025, so we're pretty optimistic, but just managing those expectations."

Ross Mayfield, an investment strategist at Baird Private Wealth Management, acknowledges investor concerns about the market's sustained strength. Mayfield suggests that while continued high returns are unlikely, the market has strong underlying support for 2026, emphasizing the importance of managing expectations.

"Absolutely. I mean, for most of this rally, what has been one of the main concerns, the concentration, the potential narrowness of the rally, the focus on the AI trade and the Mag Seven. And the reality is, it's different under the surface. You've got things like financials working, healthcare has staged a really nice comeback after, um, a lot of years underwater. Industrials have held their own. Discretionary is breaking back out. So you have a lot of other kind of, you know, real economy, cyclical, rate-sensitive names working."

Ross Mayfield highlights that the market rally is becoming broader, extending beyond technology and AI-focused stocks. Mayfield points to the improved performance in sectors like financials, healthcare, and industrials as evidence of this widening participation.

"Absolutely. I mean, we, we had the early part of a bull market rally built on multiple expansion, which is really typical coming out of a bear market low. And then earnings have taken the baton and, and really carried the day here in 2025. And, and I think that that will be the case in 2026 as well. Um, earnings growth, you know, expected broadly to be in the 13, 14 range. Even if that comes down to something like 10%, that's more than enough to, to carry a bull market."

Ross Mayfield explains that the bull market's initial phase was driven by multiple expansion, but earnings growth has since become the primary driver. Mayfield believes that projected earnings growth for 2026, even if moderate, will be sufficient to sustain the market's upward trend.

"The place that I am, um, you know, shouting from the rooftops for investors to consider their portfolio positioning is international, which has not been a laggard this year but has been a laggard for most of the last 15 years. And so I think a lot of investors have thrown in the towel on international. And the reality is that this bull market, we mentioned the breadth within the US, but it's really a global bull market. And in a lot of ways, the leadership is outside of the US."

Ross Mayfield strongly advocates for international investments, noting that while it has lagged in the US market for years, it is now showing strength and is part of a global bull market. Mayfield suggests that many investors have overlooked international markets, which could now be leading the charge.

"So I think what the Fed did brilliantly was to retain optionality. So we have a lot of data coming up next week. We're also going to get another, uh, payroll report before the next Jan meeting. Uh, so they created the optionality that if the data is weak, particularly on the labor front, that they can absolutely cut more. But they did sort of signal that the bar to cut any further is higher."

Priya Misra, a Core Plus Bond ETF Portfolio Manager at JPMorgan Asset Management, explains that the Federal Reserve strategically maintained flexibility in its policy decisions. Misra notes that the Fed's actions allow for further rate cuts if economic data weakens, particularly concerning the labor market, but has also raised the threshold for such actions.

"Yes, if I look at fundamentals of company balance sheets, companies have not really levered up. That would make me a little nervous if the debt levels kept increasing. Large debt issues done by companies that didn't have much debt. So we're not that concerned about the fundamentals of whether it's earnings or leverage or even interest coverage ratio, but spreads, so I think spreads are at the tighter end of the range, but for a good reason."

Priya Misra asserts that current credit spreads, while tight, are justified by strong corporate fundamentals. Misra points out that companies have not excessively increased their debt levels, and their earnings and leverage ratios remain healthy, supporting the current spread environment.

"Look, it's been an interesting year, right? It's been, uh, just set the stage, 2025, this year is going to be the second largest year in M&A volumes after '21, which had a lot of SPACs volumes in it. Let's also keep in mind, by the way, there were a couple of months where we were in the doldrums from an M&A standpoint, right around when tariffs came out. So all of this momentum has really happened, if you think about it, in the last eight months."

Sameer Singh, Co-Head of M&A North America at Citi, describes 2025 as a strong year for Mergers and Acquisitions (M&A), positioning it as the second-highest volume year after 2021. Singh notes that despite some earlier slowdowns due to factors like tariffs, the M&A momentum has significantly accelerated in the latter half of the year.

"You've got rates coming off, growth it remains strong. There is a significant amount of investments that's coming in from an AI and thus data center infrastructure perspective. I don't discount that that's a big driver of this time. And then I combine that with how strategics are looking at deals. There is greater clarity on how to get regulatory approval for the first time in half a decade this time."

Sameer Singh identifies several key drivers for the current M&A surge, including declining interest rates, robust economic growth, and substantial investment in AI and related infrastructure. Singh also highlights a more favorable regulatory environment, which has provided greater clarity on deal approvals after a prolonged period of uncertainty.