Record US debt, extreme stock market concentration and uncertainty about whether small caps can challenge large caps will be key factors for investors positioning their portfolios in 2026, Richard Weiss, CIO of multi-asset at American Century Investments, says.
Mr Weiss says the most pressing challenge for 2026 is the magnitude of US government debt and its rapidly growing interest cost.
"The US is now the world's second-most indebted major economy relative to GDP, trailing only Japan. It remains the undisputed and unenviable largest borrower by a wide margin, with government debt now topping US$38 trillion, which is more than twice that of China," Mr Weiss says.
"As debt rises, interest payments have become one of the fastest-growing parts of the federal budget. Higher borrowing costs push long-term yields up, which hurts stock valuations.”
Mr Weiss says the US government’s current borrowing strategy, which leans more on short-term Treasury bills, can keep interest costs manageable if short-term rates stay low. But this approach is risky if rates climb, because the debt must be refinanced more often, potentially at higher costs.
"How the US manages its yield curve will be a key issue for both politicians and investors,” Mr Weiss says.
"Artificially suppressing yields could flood the economy with cash, fuelling inflation and distorting market signals. That makes it harder for investors to judge risk, which is never good for long-term investing. The Federal Reserve hasn't ruled out using this as a tool in a crisis.”
Another major theme for 2026 is the heavy concentration within US stock markets. The ten largest companies in the S&P 500 now account for about 40 per cent of its total market value, with eight of those ten in technology or related sectors. This concentration has made the S&P 500 behave more like the tech-heavy NASDAQ 100 than at any time in recent memory.
"We believe in technology's long-term role as a growth engine," Mr Weiss says.
"But investors need to recognise the danger of having so much money continuing to flow into the same giant companies simply because of how indexes are built. A lack of diversification leaves portfolios exposed when market leadership changes, as it inevitably does."
Although small caps have lagged behind large caps for years, Mr Weiss does not expect that trend to continue.
"The valuation gap between large and small companies is becoming harder to justify. We think keeping an allocation to small caps is a sensible move," Mr Weiss says.
"Investors who diversify carefully, grasp the implications of the US debt cycle, and hold investments across different company sizes and regions are likely to be better positioned for the market’s next chapter."
