One theme is becoming predominant as we approach the new year: The tech giants that have supported the market’s recovery will no longer be in the driver’s seat.
Wall Street strategists, working at firms such as Bank of America and Morgan Stanley, are advising their clients to invest in less popular parts of the market, putting sectors such as healthcare, industrials and energy at the top of their shopping lists for 2026, at the expense of the “Magnificent Seven” group, which includes Nvidia and Amazon.
For years, investing in big tech companies was an obvious bet, given their strong balance sheets and big profits. There are now growing questions about whether the sector – which has soared about 300% since the bull market began three years ago – can continue to justify its sky-high valuations and ambitious spending on artificial intelligence technology.
The earnings releases of AI leaders like Oracle and Broadcom, which fell short of high expectations, amplified those concerns this week.
These concerns come amid growing optimism about the U.S. economy as a whole heading into the new year. The scenario could lead investors to focus on groups lagging behind the S&P 500, to the detriment of technology.
“I’ve heard that people are taking money out of ‘Magnificent Seven’ trading and moving into other parts of the market,” said Craig Johnson, chief market technologist at Piper Sandler & Co. “They’re not just going to chase the Microsofts and the Amazons anymore; they’re going to amplify that trading.”
There are already signs that the tech giants’ high valuations are starting to dampen investor interest. Flows are moving into undervalued cyclical stocks, small-cap stocks and economically sensitive segments of the market, as traders position themselves to benefit from an expected revival in economic growth next year.
Since US stocks hit their lowest point on November 20, the Russell 2000 small-cap index has gained 11%, while the Bloomberg Magnificent Seven index has recorded half that gain.
The S&P 500 Equal Weight Index, which doesn’t distinguish between a giant like Microsoft and a relatively small company like Newell Brands, has outperformed its cap-weighted sister index over the same period.
Strategas Asset Management LLC forecasts a “major sector rotation” in 2026 for companies that have underperformed this year, such as financials and consumer discretionary (non-essential goods and services), according to its president, Jason De Sena Trennert.
It’s a view shared by Morgan Stanley’s research team, which has focused on broadening its outlook for next year.
“We think Big Tech can still do well, but it will lag these new areas, particularly consumer discretionary – especially goods – and small and mid-caps,” said Michael Wilson, chief U.S. equity strategist and chief investment officer at Morgan Stanley.
Wilson, who rightly predicted a recovery from April’s slump, believes the market widening could be supported by the fact that the economy is now in an “early cycle scenario” after hitting its low point in April. This tends to be an advantage for laggards, such as financial institutions and more cyclical and lower quality sectors.
Bank of America’s Michael Hartnett said Friday that markets expect an “accelerated execution” strategy in 2026, moving from Wall Street mega-caps to mid-, small- and micro-caps.
Earlier in the week, veteran strategist Ed Yardeni of his namesake firm Yardeni Research reduced his recommendation weighting on big tech relative to the rest of the S&P 500, expecting a change in earnings growth ahead. It has been heavier in information and communications technology services since 2010.
The fundamentals are also on their side. S&P 493 earnings growth is expected to accelerate to 9% in 2026, from 7% this year, while the earnings contribution of the seven largest companies in the S&P 500 is expected to fall to 46%, from 50%, according to Goldman Sachs data.
Investors will want evidence that the S&P 493 is meeting or beating earnings expectations before becoming more optimistic, according to Michael Bailey, director of research at FBB Capital Partners. “If employment and inflation data remain at current levels and the Federal Reserve continues to ease monetary policy, we could see an upward move from the 493s next year,” he added.
The US central bank on Wednesday lowered interest rates for the third time in a row and reiterated its forecast for a further reduction next year.
Utilities, financials, healthcare, industrials, energy and even consumer discretionary are all up this year, evidence that this expansion is already underway, says Max Kettner, chief multi-asset strategist at HSBC Holdings Plc. “For me, it’s not about whether we should buy technology or other sectors, it’s also about technology and other sectors,” Kettner said. “And in my opinion, this is likely to continue in the coming months.”
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