The great market broadening is just getting started

We’ve been banging on about breadth for a while. We've discussed it in previous Livewire articles like the one below. 

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The three big events impacting markets today

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That is, we argued that the market’s rise would spread from a narrow number of stocks, most notably the Magnificent 7, to a broader range of stocks, including small caps, where we focus.

Well, here we are.

After years of underperformance against the S&P 500, US small caps have finally turned the corner.

That continued in June, with the Russell 2000 index (small caps) up +3.7%. The S&P 500 index was actually down -1.0%, weighed down by the once-poster-child Magnificent 7, which fell -8.8%.

Last week in New York, we had lunch with Michael Kantrowitz of leading investment bank Piper Sandler. If he’s not the number one US equity strategist, he’s top three.

Michael’s big call: breadth is going to keep coming.

Hawkish Fed speak, dovish market speak

A key question that will help determine the likely persistence of breadth is: what will the new Fed Chair, Kevin Warsh, do next?

Warsh chaired his first meeting in June and struck a notably hawkish tone. Indeed, the Fed’s projections pencilled in one rate RISE this year.

You can blame the Iran war-induced inflation: oil, fertiliser and shipping costs all spiked as the Strait of Hormuz was choked off.

Yet look at what markets are saying (the grey line above): inflation expectations are actually falling! Oil is now back near pre-war levels, and ships are getting through the Strait again.

Like Kantrowitz, we expect that the hike currently priced for late 2026 will likely not eventuate, which is positive for breadth and small caps.

Alongside falling inflation (and likely no rate rises), we also have other important conditions for breadth to continue:

• A US consumer who is looking stronger on the ground from all our recent company meetings.
• 75% of easings from the Fed over the last 18 months are still making their way through the economy.
• And Trump’s One Big Beautiful Bill household and business tax cuts.

Breadth is manna from heaven for small caps!

Is AI a bubble?

The big question we’re getting asked everywhere we go is whether AI is a bubble.

Sadly, if we are being honest, no one really knows with any high degree of confidence, including us.

What we do know is that this year not all ‘AI’ returns are the same.

We mapped the AI stack from top to bottom. Then, to see each layer’s return weighted by market cap, we looked at what key players have actually returned so far in calendar 2026.

As you can see, in terms of returns, the cream is at the bottom of the cake:

• Energy and electrification names are up about a third, led by companies like GE Vernova at +70%.
• Chips and memory are up roughly 80%, with Micron nearly tripling, Intel up 263% and AMD up 151%.

The top of the cake – the shiny software companies now incorporating AI tools – is where money went to die. This Applications group is down 5%, but some members fared much worse – Adobe down 44%, Salesforce down 42% and ServiceNow down 38%.

There are some winners, but lots of potentially disrupted losers. Why? Well, it comes back to a simple idea: this year, companies are getting paid to sell what’s scarce, not buy it.

The cloud giants and software firms are the buyers. Their capex is revenue for the sellers – the chip, memory and power providers. (When there is a genuine shortage of something, the seller sets the price and keeps the margin. The buyer just keeps spending.)

The question investors need to ask is: does the cream stay at the bottom of the cake? Or does 2027 finally reward the layers doing the buying? In other words, will there be a ‘return on investment’ (ROI) from all that capex for the Application, Model and Infrastructure layers?

Our take is that there better be an ROI or this cake will crumble under its own weight.

Should I dump equities to avoid potential bubble trouble?

What if it is a bubble? Does that mean you should sell your equities?

Not necessarily. History suggests you shouldn’t abandon the share market.