The U.S. stock market is undergoing significant changes. For investors, that might bring greater opportunities in 2026.
Since the end of October, the S&P 500 index has hardly moved. However, significant developments have been occurring beneath the surface of the U.S. share market.
It is called a “rotation trade,” or a stretching out of stock-market performance, by Wall Street strategists. Investors have mostly picked technology equities and other names anticipated to profit from the development of artificial intelligence technology since the bull market started in October 2022. However, as the unrelenting upward momentum on technology stocks has halted, investors have recently begun to look for chances elsewhere.
If the rotation gains momentum in 2026, nontech companies may continue to profit; however, this is mostly dependent on the bond market remaining stable and the Fed implementing additional interest rate reduction in the upcoming months. Despite indications of a worsening job market, investors are optimistic in the health of the U.S. economy, and things are off to a great start.
“We’ve already been seeing a little bit of broadening out,” UBS Global Wealth Management’s head of U.S. stocks, David Lefkowitz, told BourseWatch in an interview. “We do think it could maybe even broaden further.”
The capitalization-weighted S&P 500 SPX has been outperforming its equal-weighted brother, XX:SP500EW, for years. However, this link has now reversed, indicating that the index’s average stock is now outperforming the select few tech companies with trillion-dollar market valuations.
The SPDR S&P 500 ETF Trust SPY, which monitors the standard version of the index, has underperformed since October 31 compared to the Invesco S&P 500 same Weight ETF RSP, which tracks a version of the S&P 500 that gives shares of each member company same weight. According to FactSet statistics, the equal-weight ETF has increased 4.8% during that time period, while its capitalization-weighted competitor has increased 1.5%. On Wednesday, the S&P 500 was headed for a new record closing high.
As you can see, investors are purchasing nearly everything else and selling stock market winners. Why is that encouraging?
Additionally, according to Dow Jones Market Data, the Dow Jones Industrial Average DJIA, which is renowned for comprising a variety of primarily value-oriented firms, was up 2.9% on the year through Tuesday’s closing, its highest performance in the first three days of a calendar year since 2003.
The Dow isn’t the only one. Since October, value companies in the Russell 1000 index RLV have outperformed growth stocks in the index RLG, reversing yet another long-standing market tendency. Value stocks frequently pay dividends and have more reasonable values. The majority of the rapidly increasing profits of companies in the growth-stock camp are anticipated to be reinvested in their companies.
According to FactSet statistics, the iShares Russell 1000 Growth ETF IWF has decreased by 1.4% since October 31 while the iShares Russell 1000 Value ETF IWD has increased by 5.2%.
Is Goldilocks back?
Over the previous few months, the makeup of the stock market leadership began to change; this tendency continued into the first few trading sessions of January.
Energy XX:SP500.10, financials XX:SP500.40, and materials XX:SP500.15 have all surged ahead, up 5.4%, 7.2%, and 10.4%, respectively, while the S&P 500’s information-technology sector XX:SP500.45 has dropped by 4.2% since October 31, according to Dow Jones Market Data. With a 5.1% increase, communication services XX:SP500.50, which is home to Facebook parent Meta Platforms (META) and Google parent Alphabet (GOOGL), are also heavily exposed to the AI topic.
A few factors are viewed as motivators by investors. In 2026, it is anticipated that the U.S. economy would continue to grow steadily or perhaps expand. Investors believe that inflationary pressures will continue to be relatively low, and the rate of global economic growth is also anticipated to accelerate. Value stocks in more cyclically oriented industries have benefited from this.
Investors believe that the pattern should allow the Fed to lower interest rates a few times this year, which might boost returns for markets that are sensitive to interest rates, such as the small-cap companies in the Russell 2000 index (RUT).
Charlie McElligott, a cross-asset strategist at Nomura, told BourseWatch that the stimulus from President Trump’s One Big Beautiful Bill Act, which pushed through more tax cuts for Americans, should help improve economy during the first quarter. Despite indications that the labor market has deteriorated, optimism regarding the U.S. economy has endured, and consumer spending has kept up fairly well.
According to Jack Janasiewicz, lead strategist and portfolio manager at Natixis Investment Managers Solutions, investors are anticipating the return of the “Goldilocks” economic climate that fueled robust stock returns during the 2010s.
In a column shared with BourseWatch, Janasiewicz stated, “With inflation cooling, the Fed easing, and recession risks staying low, 2026 could mark the return of a Goldilocks economy – and a reset for both equity and fixed-income markets.”
Tiny caps
This is not to suggest that the AI trade is going away, but there may be more upheaval ahead as investors seem more eager to distinguish winners from losers.
However, the fact that other equities have begun to pick up some of the slack means that owners of a widely diversified equity portfolio can at least relax. The recent strong advances in small-cap and mid-cap companies indicate that investors are looking for possibilities outside of the S&P 500.
In 2026, Ed Yardeni, the founder and president of Yardeni Research, even speculated that small- and midcap companies would outperform their larger counterparts. He believes it is past time for them to make progress after years of poor performance. Yardeni did, however, add that he prefers to make targeted investments in specific small-cap industries, such as healthcare, industrials, and finance.
Wall Street analysts anticipate a significant increase in the profitability of smaller businesses this year, following a number of years in which the major AI players accounted for the majority of earnings gains.
According to projections gathered by FactSet, analysts anticipate that members of the small-cap S&P 600 index SML will have greater profit growth than their larger peers in 2026 for the first time since the bull market started in late 2022.
Strong profit growth is anticipated for non-tech companies in the S&P 500. According to Lefkowitz of UBS, that should contribute to a surge in the financial, material, and other sectors in 2026.
Commodity-sensitive stocks are already off to a good start. Shares of metals miners and other ailing materials stocks have been revitalized by an intense surge in metals prices. After Venezuelan leader Nicolas Maduro was captured by the United States this week, energy markets jumped upward. Smead Capital Management’s CEO and portfolio manager, Cole Smead, stated that he thinks this is only the beginning.
Focus
The S&P 500’s performance in 2025 was largely consistent with that of 2024 and 2023.
The “Magnificent Seven” megacap tech stocks continued to drive a large portion of the S&P 500’s gain last year, despite some shifts in the margins. According to UBS Group data, the cohort contributed over 40% of the index’s 17.9% overall return, which includes dividends, even though only two members—Alphabet and Nvidia (NVDA)—actually outperformed the index. According to FactSet statistics, only 30% of S&P 500 companies performed better than they did the previous year. That was about comparable to the numbers from 2023 and 2024.
The largest stocks in the S&P 500 have seen their weighting in the index rise to its highest level in decades as a result of these unequal returns. Lefkowitz and his team discovered that the top 10 stocks currently make up more than 40% of the index’s value.
Assessments
A significant valuation difference has developed during the previous five years, which is another reason why investors might be enticed to keep looking for stock market deals in the New Year.
The S&P 500 continues to fetch a substantial premium despite the recent change in the stock market’s dominant position. According to Michael O’Rourke, chief market strategist at Jones Trading, its price-to-earnings ratio, a common valuation criterion used by investment analysts, is still 36% higher than that of the equal-weighted index.
The difference is much more pronounced when compared to small-cap indexes: The price-to-earnings ratio of the S&P 500 is 49% greater than that of the S&P 600 small-cap index.
In remarks provided to BourseWatch, O’Rourke stated, “There has been a lot of false starts in recent years, so it remains to be seen if this trend will continue – but, if it does, there is a vast valuation chasm to close.”
