MFS recommends diversified portfolios as risks reshape market leadership in 2026

MFS Investment Management has argued that investors should broaden their portfolios in the second half of 2026 as a narrower set of risks begins to reshape market leadership.

In its latest market themes paper, the firm said the combination of artificial intelligence, supply-side inflation, a softer view of the US dollar and mounting strain in private credit points towards a more selective investing environment. Rather than relying on broad exposure, MFS said the emphasis should be on companies and asset classes with durable earnings, stronger balance sheets and clearer pricing power.

A central part of the argument is that the long run of US equity concentration may be nearing a change in tone. According to MFS, gains in large-cap American shares have been driven disproportionately by a small group of technology giants, but improving earnings prospects elsewhere and a better showing from smaller and mid-sized companies could help broaden the rally. The firm’s Global Market Pulse research also suggests that markets have so far absorbed geopolitical shocks better than expected, with volatility and credit spreads still below levels seen before the war in Ukraine, while US corporate-led growth has been strengthened by AI and infrastructure investment.

That shift, MFS believes, is not confined to the US. Europe, Japan and emerging markets were all singled out as regions where valuations remain more appealing and where the economic backdrop differs from America’s. The firm’s broader research notes that Japan appears relatively supported, while emerging markets offer selective opportunities, particularly in AI-linked economies and country-specific trades. Europe, by contrast, still faces energy and policy risks.

Fixed income also has a larger role to play in the new case for diversification. MFS pointed to high-quality global credit and emerging market sovereign debt as potential stabilisers for portfolios. It said investment-grade corporate fundamentals remain solid, with free cash flow still supportive despite geopolitical uncertainty. At the same time, the firm argued that liquid credit now looks more attractive as private credit faces its first serious stress test after years of rapid growth.

Defence and security spending formed another of the report’s key themes. MFS said every NATO member has now reached the alliance’s 2% of GDP defence target, while Europe and Japan have both increased military outlays. But the firm said the spending cycle stretches well beyond weapons procurement, encompassing energy, critical minerals and supply-chain security after recent export restrictions exposed how vulnerable global networks can be.

The macro consequence, MFS said, is likely to be a combination of modest support for growth and persistent pressure on inflation and bond yields, as governments fund the build-out through larger deficits and more debt issuance.

Artificial intelligence remains one of the biggest market forces, but MFS took a measured view of how investors should approach it. The key issue, it said, is not simply whether a company is exposed to AI, but whether it can translate the technology into better economics through data, customer ties, pricing power and control of critical workflows. The firm warned that AI could just as easily erode value at businesses exposed to automation, commoditisation and margin squeeze.

That caution extends to valuation. According to MFS, enthusiasm for obvious winners can leave other beneficiaries overlooked while pushing some stocks to levels that already assume near-perfect execution. It added that the AI investment boom is spreading beyond the usual cloud and software names, with semiconductor makers, utilities, power infrastructure groups and some industrial companies likely to benefit from data-centre build-outs.

The report also highlighted a return of supply-side constraints, including labour shortages, high energy costs and years of underinvestment in infrastructure. MFS said these pressures are keeping production costs elevated even as demand softens, increasing the gap between companies that can pass on costs and those that cannot. That, in turn, strengthens the case for a growth-at-a-reasonable-price approach.

On currencies, MFS said the dollar remains central to the global financial system but is gradually losing some of its appeal as a store of value. Tariffs, sanctions, fiscal pressures and questions about US exceptionalism are encouraging central banks and investors to look more closely at gold, emerging market currencies and local-currency debt.

Its sharpest warning was reserved for private credit. MFS said the asset class is now undergoing a meaningful repricing, with wider spreads, more non-accruals and a reduced illiquidity premium changing the equation for investors. The firm did not suggest the stress would trigger a wider economic shock, but it said the adjustment has made public credit more appealing because liquid markets still offer attractive yields and greater flexibility.

Private credit, MFS said, still has a place in diversified portfolios. But allocations should be sized carefully, with liquidity now treated as a core part of risk management rather than an afterthought.