As 2026 approaches, Wall Street is forming an increasingly clear consensus: the tech giants that led the bull market in recent years may step aside, with sector rotation emerging as the dominant investment theme for the new year.
Multiple Wall Street strategists, including those from Bank of America and Morgan Stanley, are advising clients to shift focus toward traditional sectors like healthcare, industrials, and energy in their 2026 portfolios, rather than the "Magnificent Seven" tech stocks such as NVIDIA and Amazon.com. This shift reflects growing skepticism about tech valuations and the returns from massive AI investments.
Market sentiment has already shown signs of change. Recent earnings reports from AI bellwethers like Oracle and Broadcom failed to meet lofty expectations, fueling investor concerns. Meanwhile, fund flows indicate a pivot from tech giants to undervalued cyclicals, small caps, and economically sensitive sectors. Since November 20 market lows, the Russell 2000 small-cap index has surged 11%, while the Magnificent Seven index gained only half that.
Goldman Sachs provided deeper analysis of this rotation trend in its December 12 report. Strategists noted that despite cyclicals' recent rally, markets haven't fully priced in potential 2026 U.S. economic conditions. Goldman forecasts 2.5% GDP growth for 2026, above the 2.0% consensus, suggesting further upside for cyclical sectors.
Farewell to Tech? Valuation and Growth Doubts Emerge While investing in mega-cap tech seemed unquestionable for years, after their staggering ~300% three-year rally, markets now question whether these stocks can justify premium valuations.
Craig Johnson, Piper Sandler's chief market technician, observed: "I hear people taking money out of the Magnificent Seven trade and putting it elsewhere. They're no longer just chasing Microsoft and Amazon—they're broadening the trade."
Veteran strategist Ed Yardeni of Yardeni Research recently recommended underweighting mega-cap tech relative to the rest of S&P 500, marking his first downgrade of IT and communication services since 2010. These shifts reflect Wall Street's cautious reassessment of tech's growth trajectory.
"The Great Rotation" Already Underway Markets aren't waiting for strategists' calls—rotation is happening. Since November 20, not only has the Russell 2000 outperformed, but the equal-weight S&P 500 (a better breadth gauge) has also beaten its market-cap-weighted counterpart.
Jason De Sena Trennert of Strategas Asset Management predicts 2026 will see a "great rotation" into this year's laggards like financials and consumer discretionary. Morgan Stanley's Michael Wilson similarly expects broadening market leadership, stating: "We think big tech can still perform well but will lag new leaders, especially consumer stocks and SMID-caps."
Bank of America's Michael Hartnett noted markets are positioning early for 2026's "run-it-hot" strategy, rotating from "Wall Street's giants" to "Main Street" small/micro-caps.
Goldman: Economic Outlook Not Fully Priced Goldman's report provides macro support for cyclicals. Ben Snider's team stated clearly in their December 12 US Weekly Kickstart: "2026's cyclical acceleration remains underappreciated."
Their core thesis: despite cyclicals' record 14-day outperformance versus defensives, growth expectations remain conservative at consensus 2.0%. Goldman economists forecast 2.5% real GDP growth for 2026, driven by easing financial conditions and fiscal policies like the "One Big Beautiful Bill Act." This gap creates opportunity, as cross-asset patterns suggest markets haven't fully priced Goldman's projected economic vigor.
Where's the Opportunity? Goldman Favors Nonresidential Construction Which sectors benefit most from economic acceleration? Goldman highlights nonresidential construction stocks.
These stocks underperformed amid weak earnings as U.S. nonresidential construction activity declined year-over-year since mid-2024. However, 2026 looks brighter—fiscal incentives and improving leading indicators like the Dodge Momentum Index suggest a friendlier environment.
Broader fundamentals support rotation. Ex-Magnificent Seven "S&P 493" earnings growth should accelerate from 7% this year to 9% in 2026, with the Magnificent Seven's contribution to S&P 500 earnings falling from 50% to 46%. FBB Capital's Michael Bailey notes that if employment/inflation data hold steady with Fed easing, the "S&P 493" could rally next year.
Risks Remain Goldman warns cyclicals' key risk is disappointing growth. For construction firms, further activity declines pose threats. Another major risk comes from sharp rate rises—historically, when 10-year Treasury yields jump >2 standard deviations (~50bps) in a month, equities typically face selling pressure. Investors should watch for yields breaching 4.5%.
Comments