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Trends in portfolio construction

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Q1 2026 investment landscape

Markets headed into 2026 firing on all cylinders, expecting AI-fueled capex and fiscal support to provide a supportive growth impulse and boost corporate earnings. However, markets took a pause during Q1 as concerns over the viability of AI investment started to surface, and global equity and bond markets sold off sharply as geopolitical events in Iran took center stage. Geopolitical conflict sent shockwaves through oil markets with the potential to lower growth and boost inflation. The range of outcomes over the near term has broadened, with higher volatility in stocks, bonds, and commodities likely to remain, even if geopolitical risks abate. The U.S. demonstrated a mix of cycle dynamics, with solid economic activity, despite lingering softness in the labor market. Most developed-market economies showed early signs of strengthening, with favorable policies providing incremental support, while China has yet to display clear signs of cyclical improvement. Policy uncertainty, inflation persistence, and elevated asset valuations warrant continued emphasis on portfolio diversification.

 

A common composition of an advisor-created portfolio

Average portfolio allocation bar chart 

Source: FI Portfolio solutions (3,081 Portfolio Reviews and Portfolio Quick Checks conducted between 1/1/26 and 3/31/26) and Morningstar.

ETF Usage

Fifty nine percent of incoming portfolios in Q1 have some allocation to ETFs. On average, 52% of an advisor’s portfolio is allocated to ETFs which shows the popularity of the investment vehicle. In Q1, we saw 38% of incoming portfolios with allocation to active ETFs – with an average allocation of 24%. To put this in context, this number was 13% in 2022. New active ETF products are being launched across the industry and advisors may continue to increase their appetite.

We observed the average portfolio has:

12
holdings
6
different asset managers
50
bps of underlying blended fees

Domestic Equity
Domestic Equity

In Q1, the average equity sleeve of a portfolio is 71%, which has been consistent with the last few quarters. 77% of the equity sleeve is allocated to U.S. equities versus 23% in international. While marginal, this is a decrease of 2% to US allocations compared to previous quarters, and the lowest mark we’ve seen since Q4 2023. Within U.S. equity, the average portfolio has 65% allocation to large-caps, 23% to mid-caps and 12% to small caps. Growth exposure remained at 29%, value had a 30% exposure and the remaining 41% was allocated to core. We remain favorable on US large caps – specifically growth given the lower volatility, less stretched valuations, and exposure to AI or AI related investments. From a sector perspective we favor Technology given strong long term price performance. Energy and Materials also look attractive given momentum, geopolitics and inflation dynamics.

Insights:

  • After three years of significant outperformance, large cap growth stocks declined during Q1. Despite higher volatility, equity categories that trailed in recent years provided positive returns, including small cap, value, and real estate.
  • The increase in capital expenditure has been primarily focused by AI-related outlays from large companies in the technology and communications sectors. Trade policy has weighed on companies in other sectors and small businesses.
  • Policy uncertainty appears to be falling from a peak, and sentiment has inflected higher following the enactment of business-friendly policies and more clarity on tariff rates. A broadening of business investment could boost growth and support the cycle.
  • The fundamental backdrop is supported by positive earnings momentum, fiscal support, and wealth-powered high-end consumption.
Alternatives
Alternatives

In a higher inflation environment, the correlations of stock and investment grade bond turned positive, where the performance of stocks and bonds moved in the same direction. This lack of diversification between stocks and bonds led advisors looking at alternatives as an option. Given the policy and geopolitical uncertainty in the current climate, alternatives can provide a good opportunity for valuable diversification.

Insights:

  • In this quarter, 10% of incoming portfolios had some allocation to Liquid Alternatives. This is decrease of 5% compared to the previous quarter. The average allocation was around 7%. We noted that 14% of portfolios had an average allocation of 5% to commodities products.
International Equity
International Equity

Twenty three percent of the equity sleeve is allocated to non-U.S. equities – which is an increase of 2% compared to Q4 and the highest level in the last 2 years. This level is still far off from the 27% exposure to international we saw in 2021. Advisors have 85% of their international sleeve in Developed markets and 15% in Emerging markets. Almost 27% of portfolios had no international equities exposure in Q1. However, this was 32% last quarter – showing that advisors had been adding net new positions in international to take advantage of the strong performance in the past year. Caution is to be maintained given the geopolitical risk but we recommend maintaining exposure to developed and emerging markets. Weaker USD has benefited price performance, and while valuations are higher relative to its own history, earnings revisions look supportive for emerging markets and can offer pockets of opportunity for active management.

Insights:

  • International equities ended the quarter mixed, with pockets of strength in Canada and Latin America. Meanwhile, EAFE and EM Asia underperformed. Commodities and energy stocks led the markets during the first quarter amid a resurgence in global inflation concerns.
  • Outside of the U.S., the breadth of countries reporting improved manufacturing conditions continued to widen, suggesting a turnaround in global industrial activity may be taking shape after nearly three years of sluggishness. Several developed-market economies have implemented policies to help support domestic consumption and corporate momentum.
  • The market expects a reversion in valuations across all major regions, but the forward P/E ratios for DM and EM are substantially lower than those in the U.S. Overall, non-U.S. equity valuations appear relatively attractive.
  • The U.S. dollar rose in Q1, remaining overvalued relative to both developed and emerging-market currencies. Historically, a weaker dollar has been a tailwind for the relative returns of DM and EM equities (versus U.S. stocks). We believe owning assets denominated in foreign currencies is an important component of portfolio diversification for U.S. investors
Fixed Income
Fixed Income

Fixed income allocations consisted of 23% of the portfolio. This is near the lows of fixed income allocations we have observed in the last 2 years. Investment grade allocation is at 81% of the fixed income sleeve, and 19% to high yield. This breakdown has been generally consistent quarter over quarter in 2025 but is a slight uptick to Investment Grade compared to last year. We remain favorable on US treasuries as they continue to provide reliable diversification.

Insights:

  • Higher interest rates pressured fixed income markets, but credit held up relatively well despite elevated volatility and market rumblings over the software sector and private credit.
  • After falling during 2025, nominal 10-year U.S. Treasury bond yields finished Q1 slightly higher. Under the surface, there was significant volatility in fixed income markets, with real yields rising sharply at the onset of the Iran conflict. Several crosscurrents influenced bond yields, including softer labor-market data, higher near-term inflation expectations, a shift in monetary policy expectations, and medium-term fiscal challenges.
  • After cutting rates and ending quantitative tightening in 2025, the market and Fed had expected two more rate cuts coming into 2026 amid soft labor markets and falling inflation. Oil supply shocks, which can cause higher core inflation over time, led the market to price out cuts, with an expectation for steady policy rates as of the end of Q1. Despite rate cuts last year, the yield curve steepened amid concerns of elevated fiscal deficits and political influence on Fed decision-making, which could challenge the Fed’s ability to reduce longer-term yields.
  • All major fixed income categories experienced higher yields during Q1, led by higher Treasury yields and wider credit spreads. Credit spreads in the Bloomberg U.S. Aggregate Bond Index and high-yield sector ended the quarter in the lowest quartile of their historical range, providing limited compensation for taking on credit risk. Overall, yields for most fixed income categories stood at or above their 50th percentile, suggesting bond valuations are roughly in line with long-term averages and provide solid income within a balanced portfolio.

All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), from 1/1/26 to 3/31/26.

In conclusion

It is important to maintain a well-diversified portfolio and employ discipline to reach investment objectives and embrace volatility to create portfolio opportunities. Reach out to our portfolio construction guidance team to help you build portfolios for this new market environment.

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Diversification does not ensure a profit or guarantee against a loss.

ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses.

Indexes are unmanaged. It is not possible to invest directly in an index.

Stock markets, especially non-U.S. markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. The securities of smaller, less well-known companies can be more volatile than those of larger companies.

Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall, and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments.

Additionally, bonds and short-term investments entail greater inflation risk—or the risk that the return of an investment will not keep up with increases in the prices of goods and services—than stocks. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease.

Alternative investments are investment products other than the traditional investments of stocks, bonds, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, real estate, and promissory notes. Some of the risks associated with alternative investments are: Alternative investments maybe relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis maybe required before buying. Costs of purchase and sale may be relatively high.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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