Photographer: Michael Nagle\/Bloomberg <\/p>\n
(Bloomberg) — One theme is becoming prevalent as the new year approaches: The technology giants that have been shouldering this bull market will no longer be running the show.<\/p>\n
Wall Street strategists at firms including Bank of America Corp. and Morgan Stanley are advising clients to buy less popular pockets of the market, placing sectors like health care, industrials and energy at the top of their shopping lists for 2026 over the Magnificent Seven cohort that includes Nvidia Corp. and Amazon.com Inc.<\/p>\n<\/p>\n
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For years, investing in Big Tech firms has been a no brainer, given their stalwart balance sheets and fat profits. Now, there\u2019s increasing skepticism over whether the sector \u2014 which has surged some 300% since the bull market began three years ago \u2014 can keep justifying its lofty valuations and ambitious spending on artificial intelligence technology. Earnings readouts from AI bellwethers Oracle Corp. and Broadcom Inc. that failed to meet lofty expectations amplified those concerns this week.<\/p>\n
Worries around the red-hot trade come amid rising optimism over the broader US economy in the new year. The setup may push investors to pile into the lagging groups in the S&P 500 at the cost of megacap tech.<\/p>\n
\u201cI\u2019m hearing about people taking money out of the Magnificent Seven trade, and they\u2019re going elsewhere in the market,\u201d said Craig Johnson, chief market technician at Piper Sandler & Co. \u201cThey\u2019re not just going to be chasing the Microsofts and Amazons anymore, they\u2019re going to be broadening this trade out.\u201d<\/p>\n
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There are already signs that stretched valuations are beginning to curb investors\u2019 interest in once-unstoppable tech behemoths. Flows are rotating into undervalued cyclicals, small-capitalization stocks and economically sensitive segments of the market as traders position to benefit from the anticipated boost in economic growth next year.<\/p>\n
Since US stocks hit their near-term low on Nov. 20, the small-cap Russell 2000 Index has gained 11% while a Bloomberg gauge of Magnificent Seven companies posted half of that advance. The S&P 500 Equal Weight Index, which makes no distinction between a behemoth like Microsoft Corp. and relative minnow like Newell Brands Inc., has been outperforming its cap-weighted counterpart over the same period.<\/p>\n
Strategas Asset Management LLC, which prefers the equal-weighted version of the S&P 500 over the standard gauge, sees a \u201cgreat sector rotation\u201d into this year\u2019s underperformers like financials and consumer discretionary stocks in 2026, according to Chairman Jason De Sena Trennert. It\u2019s a view shared by Morgan Stanley\u2019s research team, which emphasized broadening in its year-ahead outlook.<\/p>\n
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\u201cWe think Big Tech can still do OK but will lag these new areas, most notably consumer discretionary \u2014 especially goods \u2014 and small- and mid-caps,\u201d said Michael Wilson, chief US equity strategist and chief investment officer at Morgan Stanley.<\/p>\n
Wilson, who correctly predicted a rebound from April\u2019s rout, says the market widening could be supported with the economy now in an \u201cearly-cycle backdrop\u201d after troughing in April. This tends to be a boon for laggards like lower-quality, more cyclical financials and industrials. Bank of America\u2019s Michael Hartnett said Friday that markets are front-running a \u201crun-it-hot\u201d strategy in 2026, rotating into \u201cMain Street\u201d mid caps, small caps and micro caps from Wall Street megacaps.<\/p>\n
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Earlier in the week, veteran strategist Ed Yardeni of his eponymous firm Yardeni Research effectively recommended going underweight Big Tech versus the rest of the S&P 500, expecting a shift in profit growth ahead. He was overweight information technology and communications services since 2010.<\/p>\n
Fundamentals are also on their side. Earnings growth for the S&P 493 is projected to accelerate to 9% in 2026 from 7% this year as the earnings contribution from the seven largest companies in the S&P 500 is set to fall to 46% from 50%, according to data from Goldman Sachs Group Inc.<\/p>\n
Investors, will want to see evidence that the S&P 493 are meeting or beating earnings expectations before getting more bullish, according to Michael Bailey, director of research at FBB Capital Partners. \u201cIf jobs and inflation data remain status quo and the Federal Reserve is still easing, we could see a bullish move in the 493 next year,\u201d he added.<\/p>\n
The US central bank cut interest rates for the third consecutive time on Wednesday and reiterated its view for another reduction next year.<\/p>\n
Utilities, financials, health care, industrials, energy, and even consumer discretionary are solidly up this year, evidence that the broadening is already happening, points out Max Kettner, chief cross-asset strategist at HSBC Holdings Plc.<\/p>\n
\u201cFor me, it\u2019s not about whether we should buy tech the other sectors, but more about tech the other sectors participating too,\u201d Kettner said. \u201cAnd in my view, that should continue in the coming months too.\u201d<\/p>\n
–With assistance from Julien Ponthus.<\/p>\n
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