US-focused funds' outlook in 2026: Expect consolidation, moderate returns

US-focused mutual funds surged in 2025 on an AI-led rally. In 2026, expect consolidation and moderate returns; rebalance mega-cap tech exposure and invest in phases

US-focused mutual funds offered by Indian asset management companies delivered strong gains in 2025. Benchmark indices, such as the S&P 500 and the Nasdaq, have posted returns of 16–20 per cent over the past year, driven largely by a narrow group of mega-cap technology and artificial intelligence (AI)-linked companies. As they enter 2026, investors will need to rebalance their portfolios to manage risks that may arise from elevated valuations and other uncertainties.

 

How did the AI-led rally drive US markets in 2025? 

The US equity rally over the past year was highly concentrated, with a handful of large technology companies accounting for a disproportionate share of index gains. “Strong earnings growth, AI-led gains in large-cap technology stocks, and a resilient US economy supported the rally,” says Radhika Gupta, managing director and chief executive officer (MD and CEO), Edelweiss Mutual Fund.

 

“Investments by AI and mega-cap technology companies in data centres, semiconductors and cloud infrastructure improved earnings visibility,” says Niteen Dongare, director and CEO, Anand Rathi International Ventures IFSC.

 

“Corporate earnings, especially in technology, continued to beat expectations, with AI-led productivity gains becoming tangible rather than speculative,” says Arihant Bardia, chief investment officer and founder, Valtrust.

 

How did corporate execution and macro conditions support returns? 

Corporate execution also played a key role. “US companies demonstrated an ability to adapt quickly to changing macro conditions through disciplined cost control. Earnings per share growth frequently exceeded topline revenue growth. Management teams provided clear earnings guidance, and a high percentage of them met them,” says Nachiketa Sawrikar, fund manager, Artha Bharat Global Multiplier Fund. This combination supported an expansion in valuation multiples.

 

Macro conditions were supportive as well. Cooling inflation strengthened expectations of monetary easing. The Federal Reserve cut interest rates three times between September and December, lowering discount rates for growth stocks. The US economy avoided a recession despite tighter financial conditions. Employment remained stable. Strong corporate buybacks and steady global capital inflows—particularly through passive funds—amplified equity returns.

 

What is the outlook for US-focused funds in 2026? 

The outlook for 2026 remains cautiously bullish. Returns are expected to moderate and become more broad-based than the AI-led surge of recent years. “Moderate but sustained growth is likely, driven by earnings visibility, productivity gains from AI, and a gradual easing cycle from the Federal Reserve,” says Gupta. After the sharp run-up of the past three years, the market may enter a consolidation phase, making conditions more fragile than in 2025.

 

How could AI-driven productivity gains support markets in 2026? 

AI-driven productivity gains could support markets in 2026 if technology companies are successful in monetising their investments. Strong earnings visibility among large-cap US companies may also provide support. Continued global capital inflows, driven by the depth, liquidity and innovation leadership of US markets, remain another positive.

 

“Massive capital expenditure by hyperscalers in data centres, cloud infrastructure and AI hardware provides multi-year growth visibility across the ecosystem,” says Bardia.

 

A stable or easing policy environment, provided inflation remains contained, would further aid sentiment.

 

What valuation and macro risks should investors watch? 

Elevated valuations, particularly among mega-cap technology stocks, leave little room for error. Any earnings downgrades in AI-linked businesses could trigger volatility. “Excessive concentration in a handful of large technology stocks increases vulnerability to earnings disappointments or regulatory interventions,” says Bardia.

 

If large investments in AI infrastructure fail to deliver commensurate returns, markets could face a sharp correction. The circular nature of investment flows within the AI ecosystem has also raised concerns.

 

One of the near-term macro risks is a potential resurgence in inflation. “This could be driven by heavy AI-related investments across economies, tariffs and counter-tariffs, or supply-chain fragmentation, which could force interest rates to stay higher for longer,” says Dongare.

 

Geopolitical and trade risks, particularly US–China tensions and disruptions to critical supply chains such as semiconductors and rare-earth minerals, could spark sell-offs.

 

“The labour market is showing signs of moderation, which is weighing on consumer sentiment,” says Sawrikar. A broader slowdown would hurt earnings.

 

Market-structure risks—crowded trades, passive flows and leveraged strategies—could amplify drawdowns during periods of stress.

 

Should investors book profits or stay invested in US exposure? 

Long-term investors should remain invested but rebalance portfolios if US equities have grown disproportionately relative to their original allocation. Selective profit-taking in highly concentrated AI or mega-cap exposures can help reduce downside risk.

 

Investors holding US exposure through domestic mutual funds should be cautious about exiting fully. “Given current overseas investment limits, re-entry may not be possible. The alternative Liberalised Remittance Scheme (LRS) route remains cumbersome and less efficient for smaller investors,” says Bardia.

 

How should new investors enter US markets in 2026? 

Avoiding the US market altogether is not advisable for new investors. “The US accounts for about 43 per cent of global corporate profits, up from 33 per cent in 2017,” says V K Vijayakumar, chief investment strategist, Geojit Investments. The market remains home to many of the world’s most innovative and cash-generative companies.

 

“Exposure to US equities offers access to sectors such as technology, healthcare innovation and advanced manufacturing that are under-represented in Indian markets,” says Raghvendra Nath, managing director, Ladderup Asset Managers.

 

US investments also reduce home-bias risk through geographic diversification. “An important lesson from India’s huge underperformance this year is the need for geographical diversification,” says Vijayakumar. US exposure also acts as a hedge against rupee depreciation.

 

New investors should avoid aggressive lump-sum investments at current valuations. “They should opt for phased entry with a long-term horizon, focusing on quality and diversification,” says Nath. A minimum investment horizon of seven to 10 years is advisable.

 

What return expectations and allocation range are realistic? 

New investors must enter with realistic expectations. “Returns of 15–18 per cent seen in 2025 are above long-term averages. A base case of 8–10 per cent US dollar returns, with some rupee tailwind, is more realistic over long horizons,” says Mohit Gang, co-founder and CEO, Moneyfront.

 

Investors should also prepare for interim corrections and understand currency risk: a strengthening rupee can dampen returns.

 

According to Gang, allocating about 10–25 per cent of the equity portfolio to US markets is prudent for most investors, with the higher end (20–25 per cent) suitable only for aggressive investors.

 

What is the best fund approach for beginners? 

Beginners should initially opt for passive funds. “A core allocation to an S&P 500 index fund or a total-market index fund provides diversified exposure at low cost. A small satellite allocation to a Nasdaq-focused fund may suit investors with high conviction in long-term technology growth, who can handle high volatility,” says Gang. Exposure to narrow thematic and sector funds should remain limited until investors gain sufficient experience in global investing. 

 

 

The writer is a Mumbai-based independent journalist