Webcast: Market Views 3Q26

A Historic Divergence, Underneath a Fragile Rally

Q3 2026 was a historically lopsided quarter, with mega caps dominating while small caps posted their third-worst relative showing since 1979. Major large cap indices stayed near highs, but underneath that headline was a deeply narrow market: breadth at its weakest since the dot-com era, momentum reversing and the average stock well off its peak.

Key Points

• Mega caps dominated as small caps suffered historic relative underperformance, with the Mag 7 representing 508% of the Russell 1000 Growth return
• Market breadth deteriorated to dot-com era levels, with the S&P 500 within 1% of its high while the median stock sits 16% below its own
• High beta momentum and the AI trade sold off sharply before rebounding in September, while rising rates and credit market stress added to volatility
• The economy remains resilient, with manufacturing expanding for nine straight months and unemployment below 5% for 60 consecutive months, though inflationary pressures are building
• Valuations have reset and correlations are at an eight-year low, and history suggests narrow leadership does not preclude further gains, but a rotation toward quality, cash flow and areas beyond AI could favor active management

We remain cautiously constructive. Concentration and extended momentum defined this quarter, but with earnings strong, valuations reset and correlations near multi-year lows, we believe the setup favors disciplined, bottom-up stock selection. We see opportunity in Health Care, cyclical recovery, Aerospace and select Software where data ownership, workflow complexity and security provide durability, while staying mindful of risks around rates, credit and AI spending. Explore the complete Q3 breakdown to see how we’re thinking about it.

View the Webcast Slides

This material is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security. Past performance is not indicative of future results. All investments involve risk, including loss of principal. Westfield Capital Management Company, L.P. is a registered investment adviser.