The Shifting Trends That Drove Stock Funds in Q3 2026

Equity markets’ third-quarter rise masked sharp underlying swings among equity funds.

Despite geopolitical tensions, US Treasury yields climbing to multidecade highs, and increasing artificial intelligence safety concerns, the Morningstar US Market Index finished the quarter up 1.7%, bringing its 2026 year-to-date return to 12.6%. The Morningstar Global Markets ex-US Index also rose 0.7%, lifting its year-to-date gain to 13.9%. But stock funds’ fortunes diverged as the AI-fueled rally that defined 2026’s first half lost some steam and equity market leadership shifted.

AI Losers Bounced Back

Technology still ranks among the year’s best-performing equity Morningstar Categories, but a pause in the AI infrastructure rally cut into tech funds’ lead. Semiconductor stocks, the AI “winners” that propelled tech’s second-quarter gains, cooled, and software shares, the AI “losers” that had plunged earlier, rebounded. The Morningstar US Semiconductor Index fell 4% while the Morningstar US Software Capped Index rose 25% in July and August. The semiconductor index then rallied 7% while the software benchmark dropped 2% in September; still, software stocks closed out the quarter well ahead of semiconductors, rewarding some active managers and punishing others.

Beneficiaries spanned styles and sizes. Oakmark Select OAKLX posted one of the large-value category’s best quarterly marks, notching a 12% gain. Holdings like Salesforce CRM and Paycom PAYC, which rallied a respective 47% and 73% in the third quarter, helped. Mid-cap value fund Hotchkis & Wiley Opportunities HWAAX rose 5%, as top holdings Workday WDAY and Microsoft MSFT regained ground. Meanwhile, Brown Capital Management Small Company BCSIX, which had more than 36% of its assets in software stocks like Veeva Systems VEEV and Manhattan Associates MANH, gained 9% while its average small-growth peer tumbled 10%.

Some of the quarter’s weakest performers were thematic funds with a lot of AI infrastructure exposure. Tortoise AI Infrastructure ETF TCAI remains one of 2026’s top-performing US stock funds with a year-to-date gain of 58% through September, but concentration in tech hardware and semiconductor-related stocks contributed to its 16% third-quarter loss. IShares A.I. Innovation and Tech Active ETF BAI and AB Disruptors ETF FWD also suffered, with both falling 11% in the quarter.

Small Caps Cooled Off

Amid surging interest rates, large-cap funds proved more resilient than small caps. Each US large-cap fund category achieved small gains, while small-cap categories fell between 5% and 10%.

After leading the market in the second quarter, small caps lost ground as the fervor for more rate-sensitive and speculative stocks cooled. Small-growth funds suffered the most, falling 10%. Several of the category’s top second-quarter performers logged some of the third quarter’s worst returns. Lord Abbett Developing Growth LAGWX slid 17%, Invesco Small Cap Growth GTSAX lost 16%, and AB Small Cap Growth QUASX fell 14%.

Each of those three small-growth funds’ approaches emphasizes earnings and price momentum. Their poor performance reflected another trend reversal: High-momentum stocks, such as those related to AI, pulled back after a blistering April to June run. Common holdings like data center construction firms Sterling Infrastructure STRL and Argan AGX gave back some of their triple-digit first-half gains in the third quarter, falling a respective 41% and 53%.

Beyond Technology

Energy, healthcare, and foreign value funds topped quarterly return rankings as AI-related leaders took a break. Flaring geopolitical tensions drove increased oil prices and lifted equity energy funds 6% higher. In healthcare, improved earnings expectations and strength in pockets of biotechnology helped drive the average fund’s 4% gain. Fidelity Advisor Energy FFOBX rose 15%, and Fidelity Select Health Care FSPHX returned 9%, making them two of the period’s standouts.

Meanwhile, foreign value funds’ performance may have been as much a function of what they didn’t own as of what they did. The typical foreign small/mid-value fund gained 6%, while the foreign large-value category rose 2%. By nature, these funds often have less high-growth AI exposure and more concentration in international financials and industrials stocks. Within the foreign small/mid-value category, Oakmark International Small Cap OAKEX rose 6%, benefiting from holdings such as European recruitment firm Hays HAS, which doubled in value, and Australian healthcare equipment manufacturer Ansell ANN, which gained 43%.

Emerging Markets Took a Breather

As AI ebullience calmed, emerging-market stocks turned in a lackluster quarter. The Morningstar Developed Markets ex-US Index’s 1.3% rise edged out the Morningstar Emerging Markets Index’s 0.8% decline.

After Pacific/Asia ex-Japan stock funds returned 23% and the diversified emerging-markets category gained 21% in the second quarter, they fell 2.5% and 1.3%, respectively. AMG Veritas Asia Pacific MSEIX lost 12% in the third quarter as top holdings Taiwan Semiconductor Manufacturing TSM, Samsung Electronics 005930, and SK Hynix 000660 each faltered, along with other AI-related stocks. Sharing those holdings, one of the biggest diversified emerging-markets losers was American Century Emerging Markets TWMIX, which slipped 7%.