Core Viewpoint - The market is expected to shift focus towards earnings growth in 2026, particularly in the small and midcap sectors, which are projected to experience a recovery from previous earnings recessions [2][3][5]. Small and Midcap Sector - Small and midcap companies are anticipated to see earnings growth improve from low single-digit this year to low double-digit next year, driven by a recovery from two years of declining earnings [3][5]. - Companies in the small and midcap space that have raised their Q4 and 2026 guidance during the Q3 reporting period have outperformed the S&P 500 [3]. - The economic sensitivity of small and midcap stocks is expected to provide a favorable setup as macroeconomic conditions stabilize and potential Fed rate cuts occur [6]. AI Sector Dynamics - The AI sector is characterized by persistent spending dynamics, with capital expenditure improvements expected through the end of the decade [7][8]. - Ongoing volatility is anticipated as companies navigate the pace and justification of their AI-related spending [8]. - There is a focus on stock selection within the AI space, with an emphasis on semiconductors and software, while communication services have been adjusted to a market weight [10]. Broader Market Implications - Companies not directly associated with AI are beginning to implement AI processes, which could lead to higher productivity, improved margins, and reduced earnings volatility in the long term [11].