The resilience of a significant shift in investor strategy is set for a major examination as the latest U.S. corporate earnings period gets underway. Money has been steadily flowing out of the technology giants that dominated market gains for years and into sectors like banking, consumer goods, and industrial materials.
The Rotation in Focus
This strategic pivot, betting on companies that thrive in an accelerating economy, faces a immediate reality check. Data reveals that positioning in megacap growth and technology stocks has drifted lower, while exposure to small-cap companies has reached its highest point in nearly a year. The Russell 2000 index of small-cap stocks has outperformed the S&P 500 for seven consecutive days, a streak last seen in January 2019.
The core challenge for investors making this move is that Big Tech is still projected to be the dominant force behind fourth-quarter profit growth for S&P 500 companies. According to Bank of America Corp., tech firms in the index are estimated to show year-over-year earnings growth of 20%. In contrast, earnings expansion for non-tech companies is slated to decelerate sharply from 9% to just 1%.
The Burden on Corporate Guidance
This disparity places immense pressure on the forward-looking statements from cyclical sector leaders. Companies such as Caterpillar Inc., Procter & Gamble Co., and JPMorgan Chase & Co. will need to provide robust forecasts that confirm the widespread Wall Street expectation of an economic surge in 2026.
"Guidance will be an important tell," said Michael Kantrowitz, chief investment strategist at Piper Sandler & Co. He emphasized that broad stimulus tailwinds are now in play, which he views as necessary for a sustainable broadening of earnings beyond the tech sector.
Analyst forecasts for the coming year underscore the test this rotation trade will face. Bloomberg Intelligence, led by Wendy Soong, expects the S&P 500 Value cohort to grow profits by 9%—only one-third of the expansion rate forecast for growth stocks. The technology sector, a major component of the growth index, is projected to lead with profit expansion forecast at a substantial 30%.
Reasons for Optimism in Cyclical Sectors
Despite the towering tech forecasts, there are foundations for confidence in the rotated-into sectors. Industrial firms in the S&P 500 are projected to increase profits by 13%, while discretionary consumer companies are slated for 12% growth. Sectors like health care, materials, and consumer staples are also expected to deliver gains approaching 10%, based on BI data.
Kantrowitz points to several potential tailwinds, including Federal Reserve easing, lower oil prices, easier lending standards, and fiscal stimulus, which could benefit the broader economy and these market segments.
Ultimately, the earnings season that began in January 2026 will determine if this notable rotation has staying power. After years where a handful of megacap AI firms carried the market, robust corporate outlooks are essential to justify moving money away from those longtime winners and into economically sensitive stocks.
