Megacaps Rally; GMO Warns S&P May Fall 2026

Introduction

As 2025 draws to a close, U.S. futures opened with upside momentum while a prominent asset manager issued a contrarian warning about next year. Large-cap technology and AI-linked stocks have been carrying the indices higher and sit in technical “buy zones,” yet GMO cautioned that concentrated exposure could translate into a pullback for the S&P 500 in 2026. Recent trading after the holidays reinforced the two themes: selective strength among megacaps and heightened dispersion across individual names.

Year-end Momentum and Megacap Leadership

Futures, buy zones and the names to watch

U.S. futures were positioned to open higher on December 28, driven by continued appetite for large-cap technology. Several megacaps are reported to be in or near technical buy zones — commonly used levels where traders consider initiating positions — including Nvidia, Tesla, Apple, Alphabet and GE Aerospace. That concentration of gains in a handful of stocks has helped the S&P 500 and Nasdaq hold near recent highs.

For investors, buy zones are signals rather than guarantees: they show where momentum and price structure align for new entries, but they do not remove macro or idiosyncratic risk. Institutional flows into AI and chip-related names remain a clear driver of index-level strength.

GMO’s Caution: Why the S&P 500 Could Slip in 2026

Concentration risk centered on AI and growth names

Investment firm GMO, led by portfolio strategist Ben Inker, publicly flagged the potential for single-digit negative returns in the S&P 500 during 2026. Their thesis focuses on valuation concentration: a small subset of AI and growth stocks now represents a meaningful share of the index’s market-cap weighting. If sentiment toward those names reverses, index performance could follow.

GMO’s stance is not a view of a systemic collapse but a call for prudence. They highlight the risk that high expectations priced into AI leaders leave limited upside and greater vulnerability to disappointment, regulatory changes, or slowing revenue acceleration.

Where GMO sees alternatives

As part of its outlook, GMO pointed to opportunities outside U.S.-large-cap growth. Specifically, the firm highlighted Japanese small-caps and European value stocks as relatively undervalued assets that could outperform if a rotation away from concentrated AI winners occurs. For investors, this frames a classic rebalancing trade: take profits where valuations are stretched and redeploy into cheaper, underowned markets.

Post-Holiday Trading: Diverging Movers

Winners and losers in short-term tape

Trading immediately after the holiday showed mixed internals. Nvidia, buoyed by continued AI demand and recent commercial links, ticked higher (about +1% in reported sessions) and remained within its technical buy zone. Tesla stayed near its highs, preserving its role as an index driver.

Conversely, several smaller and speculative names pulled back: Palantir fell roughly 2.8% from its recent buy point, D-Wave dropped over 8%, and Rocket Lab slid close to 7% after earlier strength. These moves illustrate how liquidity and news flow can sharply affect smaller-cap and high-volatility equities even while megacaps broadly sustain gains.

Commodities and miners

Miners such as Freeport-McMoRan and Teck Resources advanced amid record-high copper prices. Elevated copper supports industrial and green-energy narratives, lifting miners’ stocks independently of megacap tech performance. This divergence underscores the importance of watching commodity-driven sectors as potential hedges or alternate return sources.

Conclusion

The current market setup combines concentrated leadership among megacap technology stocks with an explicit warning from GMO about potential S&P 500 weakness in 2026. Short-term tape is likely to remain selective: big names may continue to buoy benchmarks, while smaller, more speculative stocks stay vulnerable to sharper moves. Investors should consider concentration risk, reassess valuation exposure to AI-heavy names, and weigh reallocations into undervalued international equities or commodity-linked sectors where fundamentals have improved.

Practical steps include reviewing portfolio weights in top holdings, setting disciplined entry and exit plans around technical buy zones, and maintaining liquidity to take advantage of any broadening of the rally or dislocations that may arise in early 2026.