Underweight Tech Strategy Emerges as Winning Approach in 2026 Markets
For years, loading up on the biggest United States technology stocks delivered consistent riches, while avoiding them was considered a surefire path to professional failure. In a remarkable reversal, 2026 has proven the opposite to be true.
Fund Managers Reap Rewards from Tech Reduction
Mutual fund managers who have been cutting exposure to the volatile technology stocks that have roiled markets this year are experiencing exceptional performance. According to data from Goldman Sachs Group Inc., nearly 60 percent of large-cap mutual funds are currently outperforming their benchmarks, representing the highest share since 2007.
Large-cap core and growth managers have posted particularly strong gains, with weak returns from Big Tech stocks contributing significantly to their success. This marks a dramatic shift from previous years when technology concentration was the dominant market strategy.
Market Rotation Creates New Winners and Losers
While the S&P 500 Index has remained virtually flat seven weeks into the year, significant reordering has occurred beneath the surface. Technology companies within the index have declined more than four percent, while energy and materials producers have rallied at least 15 percent.
Producers of household necessities have jumped 13 percent alongside industrial companies, while financial firms and makers of non-essential consumer goods have experienced declines. This sector rotation reflects changing investor priorities and market dynamics.
Artificial Intelligence Drives Market Disruption
The market disruption has been largely driven by artificial intelligence applications that threaten to upend entire industries. Software firms faced significant pressure several weeks ago, followed by insurers, wealth managers, law firms, and publishers among other economic sectors.
Simultaneously, investors have been reducing exposure to Big Tech as the group's weighting in the S&P 500 swelled past 30 percent, instead loading up on companies more closely tied to the economic cycle.
"Many active managers weren't necessarily 'anti tech,' they just didn't want to keep paying up for the same handful of crowded megacap and software names," explained Dave Mazza, chief executive at Roundhill Financial. "In a rotation where leadership broadens and more sectors start contributing, that willingness to own areas outside of tech is finally paying off."
Market Breadth and Dispersion Favor Active Management
Active funds have benefited significantly from sharp rotations across the equity market. This rotation has made market breadth—a measure of how many stocks are participating in a rally—increasingly important for active managers.
Approximately 66 percent of stocks in the S&P 500 are trading above their 100-day moving average, according to data compiled by Bloomberg. Additionally, the S&P 500 Equal Weight Index climbed to a fresh record high last week, indicating broader market participation.
The dispersion—the gap between the best and worst performing stocks in the benchmark—has widened to 41 percentage points, ranking in the 93rd percentile since 1980. This increased dispersion has created optimal conditions for fund managers who began trimming tech exposure as early as 2024.
Software Stocks See Significant Under-Investment
The trend is particularly evident in hard-hit software stocks, where the average large-cap mutual fund entered 2026 under-invested in the group by 24 basis points compared to its weighting in the stock market, excluding Microsoft Corp.
"Since 1990, market breadth and return dispersion have been the two most important drivers of mutual fund performance," noted Goldman's research team including Ryan Hammond and Daniel Chavez in their analysis.
The current market environment represents a fundamental shift from the technology-dominated strategies of previous years, with underweight tech positioning emerging as a surprisingly effective approach for investment professionals navigating the AI-driven economic transformation.
