Why Growth Equities Can Power Ahead in 2026

Matt Freund, CFA,  Michael Kassab, CFA

Summary Points:

We believe:

• 2026 supports continued exposure to growth equities—with positive drivers ranging from procyclical fiscal policy to the solid earnings growth achieved by many companies.
• With midterm elections in the mix, 2026’s equity market gains may not rival the unusually strong returns of recent years.
• Selectivity will be essential; Calamos Growth Fund’s portfolio favors domestic capital expenditure beneficiaries and pro-cyclical themes.
• Our all-cap mandate will continue to confer valuable advantages as market leadership broadens beyond mega-caps.

2025 will be remembered as a year that truly tested investor conviction. Markets endured multiple shocks yet still managed a third consecutive year of strong double-digit returns. The path was anything but smooth, yet the S&P 500 Index delivered a total return of 18% despite policy shocks, sticky inflation, and a 43-day government shutdown.

The year began with an unexpected jolt in late January when Chinese artificial intelligence (AI) startup DeepSeek released a model that performed comparably to leading Western models—supposedly at a fraction of the cost—briefly shaking confidence in US technological leadership. Markets absorbed the blow quickly as hyperscaler spending continued, but it highlighted a key investor question that has persisted ever since: How much longer can the enormous spending on AI continue?

April, of course, brought “Liberation Day” tariffs and a swift 10% correction, but the administration’s quick pivot to a 90-day pause sparked one of the largest single-day rallies since 2008. By May, indexes had recovered, but tariff policy remained a source of recurring volatility. The middle part of the year saw markets navigating a “higher for longer” rate environment, as inflation remained stubbornly near 3% and the Federal Reserve stayed on hold throughout the summer. The Fed finally resumed rate cuts in September and October, but the prolonged government shutdown created a data void for the Fed, which kept investors guessing whether rate cuts would continue in December.

All the while, the US economy proved quite resilient, despite growing signs of labor market weakness and declining consumer sentiment. Both GDP growth and corporate earnings held up remarkably well, allowing equities to grind higher despite the volatility. With that said, market leadership has remained quite narrow, with so-called “AI winners” driving the overall market once again. Overall, just three of the 11 sectors in the S&P 500 outperformed the broader index.

Reasons for Continued Optimism

While we acknowledge that the path forward remains uncertain, we view the setup for 2026 as constructive. Several tailwinds could support a broadening recovery: procyclical fiscal policy via the One Big Beautiful Bill should help boost GDP; lagged benefits from 2025 interest rate cuts will carry forward; lower energy prices should help ease budgets for both consumers and businesses; tariff headwinds should continue to fade as the economy adjusts; and deregulatory efforts may support productivity growth.

Valuations remain elevated, but they are increasingly supported by solid earnings growth. Forward earnings estimates have reached successive highs since the spring correction, while multiples have remained relatively stable. We believe earnings-driven market gains are much healthier than those simply driven by multiple expansion.

The past few months of bumpiness have demonstrated that the AI theme is indeed maturing. Going forward, we expect the market to increasingly reward AI adopters over enablers, favoring companies demonstrating tangible efficiency gains and commercial traction. Concerns about circular financing emerged this past fall, as interconnected deals between chipmakers, cloud providers, and AI labs drew comparisons to dot-com-era vendor financing. While we remain vigilant to the potential risks, AI capital expenditure continues at scale, providing a meaningful cushion to broader economic activity. The key question for 2026 is whether commercial monetization can keep pace with infrastructure investment.

Selectivity will be essential. In Calamos Growth Fund (CGRIX), we favor exposure to domestic capital expenditure beneficiaries and pro-cyclical themes over consumer-facing names that are still pressured by affordability constraints. Our all-cap mandate allows us to capture opportunities as leadership broadens well beyond mega-caps.

Risks include persistent inflation, labor market deterioration, and the potential that AI monetization timelines disappoint market participants. Supreme Court action on IEEPA tariffs could also spark volatility regardless of the outcome. It is also worth noting that midterm years historically produce more modest gains. Our expectations for the market in 2026 are calibrated accordingly, but we believe the current backdrop supports continued exposure to growth equities with disciplined risk management.