Investing.com - Wolfe Research said narrow market leadership is likely to persist through 2026, citing fund flows and the growing concentration of major stocks in benchmark indexes as key drivers of the trend.

The firm said markets began to broaden out late last week as investors rotated into more defensive sectors, price action the firm compared to the AI Disruption trade that occurred in February 2026. Wolfe Research said a resolution with Iran would be needed for markets to broaden out for the right reasons, though it expects any broadening to concentrate in select areas such as discretionary stocks.

The firm identified five reasons for continued narrow leadership: fund flows and retail investors, scarce secular growth, animal spirits and mega-cap IPOs, mega themes driving the economy, and earnings-per-share revisions concentrated in technology, media and telecommunications.

Wolfe Research said the key reason markets will remain narrow stems from increased retail investor involvement and fund flows. With the largest 10 S&P 500 stocks making up about 40% of the index, the firm said fund flows are mechanically keeping index performance narrow.

The firm said passive assets are growing as more exchange-traded funds come to market, with flows benefiting the largest sectors and stocks in the S&P 500. Wolfe Research said this has a direct impact on technology stocks, which may be a key reason the group has broadened year-to-date.