①On Wall Street, as the New Year approaches, an increasing number of industry institutions seem to be embracing a theme: the tech giants that have propped up the bull market in recent years may no longer dominate the market next year… ②They are listing sectors such as healthcare, industrials, and energy as their top investment picks for 2026, rather than the 'Magnificent Seven' like NVIDIA and Amazon.
Cailian Press, December 15 (Editor: Xiaoxiang) On Wall Street, as the New Year approaches, an increasing number of industry institutions seem to be embracing a theme: the tech giants that have propped up the bull market in recent years may no longer dominate the market next year…
Strategists at several Wall Street firms, including Bank of America and Morgan Stanley, are now advising clients to buy into less popular areas of the market – they are listing sectors such as healthcare, industrials, and energy as their top investment picks for 2026, rather than the 'Magnificent Seven' like NVIDIA and Amazon.
For years, investing in tech giants has been regarded as a wise and enduring choice in the U.S. stock market – their robust balance sheets and substantial profits have been compelling. However, doubts are now growing over whether this sector can continue to justify its high valuations and heavy investments in artificial intelligence technologies – since the start of the bull market three years ago, the sector has surged approximately 300%.
Last week, disappointing earnings reports from Oracle and Broadcom, both seen as bellwethers of the AI sector, further intensified these concerns.
Meanwhile, worries surrounding this once-hot AI trade come amid growing optimism about the overall U.S. economy heading into the new year. This backdrop could prompt investors to shift into lagging sectors of the S&P 500 at the expense of mega-cap tech stocks…
Institutions widely anticipate a style rotation in U.S. equities.
Craig Johnson, Chief Market Technician at Piper Sandler & Co., stated, "I’ve heard some people are pulling out of 'Magnificent Seven' trades and moving into other areas of the market. They’re no longer just chasing giants like Microsoft and Amazon but expanding their investments into a broader range of sectors."
Signs of overvaluation have begun to dampen investor enthusiasm for tech giants. As traders position themselves to capitalize on growth expectations for next year, funds are shifting toward undervalued cyclical stocks, small caps, and economically sensitive sectors.
Market data shows that since the U.S. stock market hit a recent low on November 20, the Russell 2000 small-cap index has risen by 11%, while the Bloomberg-compiled Magnificent Seven index has gained only half as much. During the same period, the equal-weighted S&P 500 index has consistently outperformed its market-cap-weighted counterpart – the equal-weighted index treats giants like Microsoft and smaller companies like Newell Brands equally.
Jason De Sena Trennert, Chairman of Strategas Asset Management, pointed out that the company currently favors the S&P 500 Equal Weight Index over the benchmark index, anticipating a 'significant sector rotation' in 2026, with funds flowing into sectors that have lagged this year, such as financials and consumer discretionary stocks.
Morgan Stanley's research team shares the same view, with its annual outlook report emphasizing the trend of sector rotation. Michael Wilson, Chief U.S. Equity Strategist and Chief Investment Officer at Morgan Stanley, stated, 'We believe the tech giants can still perform well but will lag behind emerging areas, particularly consumer discretionary (especially durable goods) and small- and mid-cap stocks.'
Wilson, who accurately predicted the rebound after the April plunge, noted that as the economy enters an 'early cycle phase' following its bottoming out in April, market breadth trends are likely to gain support. This environment often benefits lagging sectors such as lower-quality, more cyclical financials and industrials.
Will next year's market see 'broad-based gains'?
Michael Hartnett, Chief Strategist at Bank of America, noted last Friday that the market is positioning itself ahead of a 'hot economic operation' strategy for 2026, rotating from 'Wall Street's' mega-cap stocks into 'Main Street's' mid-cap, small-cap, and micro-cap stocks.
Earlier last week, Ed Yardeni, a veteran Wall Street strategist, issued a report through his firm, Yardeni Research, advising investors to underweight tech giants relative to other sectors of the S&P 500, anticipating a shift in earnings growth. Since 2010, he has consistently recommended overweighting the information technology and communication services sectors but recently reversed this stance.
Fundamental data also supports this view. According to Goldman Sachs, as the earnings contribution rate of the top seven companies in the S&P 500 drops from 50% to 46%, the earnings growth rate of the remaining 493 companies in the index is expected to accelerate from 7% this year to 9% by 2026.
Michael Bailey, Director of Research at FBB Capital Partners, noted that investors will look for evidence that these 493 companies meet or exceed overall earnings expectations before turning more optimistic. 'If employment and inflation data remain stable and the Fed continues its easing policy, they may experience upward momentum next year,' he added.
Last Wednesday, the Federal Reserve's third consecutive interest rate cut, along with reaffirmation of expectations for another rate cut next year, provided additional momentum to the U.S. stock market.
Max Kettner, Chief Cross-Asset Strategist at Hsbc Holdings, noted that utilities, financials, healthcare, industrials, energy, and even consumer discretionary sectors have all seen robust gains this year, indicating that a broad-based market rally is already taking shape.
Kettner stated, 'For me, the focus is not on whether to buy technology stocks or other sectors, but on whether technology stocks can drive other sectors to rise together. I believe this trend will continue in the coming months.'
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Editor/jayden