In a surprising twist to the typical year-end "window dressing" strategy—where traders typically boost winning stocks and dump underperformers—investors are now rotating out of this year's tech giants, which drove the S&P 500's 17% annual gain, and flocking to beaten-down small-cap stocks and traditional economy sectors like transportation. Since hitting a short-term low on November 20, the Russell 2000 Index, a benchmark for small caps, has surged 9.4%, hitting a record high on Thursday. Micro-cap stocks have jumped 12%, while cyclical sectors like trucking, shipping, and airlines have rallied 11%, extending gains for multiple sessions. Over the same period, the S&P 500 rose just 5.1%.
This shift reflects growing skepticism about the "AI-driven tech rally" that propelled giants like Nvidia (NVDA.US) and Microsoft (MSFT.US), whose momentum has stalled. Instead, optimism about a US economic recovery in the first half of 2026 is driving investors toward undervalued value stocks. Strategas Asset Management LLC recommends overweighting the equal-weight S&P 500 Index over its market-cap-weighted counterpart, citing expectations that Trump-era tax policies could boost consumer spending and corporate investment, alongside potential World Cup-related economic tailwinds next year.
Bank of America's chief investment strategist, Michael Hartnett, echoed this view, advising clients last Friday to accumulate mid-cap stocks on dips in 2026, anticipating government intervention to curb inflation and stabilize unemployment. His team also flagged cyclical sectors—homebuilders, retail, REITs, and transports—as poised for outperformance. John Stoltzfus of Oppenheimer Asset Management, Wall Street's most bullish strategist for three straight years, likewise favors cyclical plays like communications services, industrials, financials, and consumer discretionary, predicting an 18% S&P 500 rally to around 8,100 next year on robust growth and accommodative policy.
November’s market action underscored this rotation: The equal-weight S&P 500 climbed 1.7%, while the cap-weighted version edged up just 0.3%. Bank of America data shows the S&P 500’s top 50 firms fell 0.6% for the month, while the remaining 450 mid- and small-cap constituents rose 1.3%. Healthcare, communications services, and materials led gains, with healthcare soaring 9.1%, while tech slumped 4.4%. Value stocks decisively outpaced growth and other factors, marking a sharp reversal from their underperformance earlier this year.
"Even momentum stocks lagged significantly, signaling a potential leadership change where former laggards are taking the baton," noted Savita Subramanian, Bank of America’s head of US equity and quantitative strategy. Citadel Securities’ Scott Rubner observed that the Russell 2000’s multi-session outperformance against the S&P 500 and Nasdaq 100 reflects an ongoing sector rotation, triggered by post-earnings AI spending concerns among tech giants.
Charles Schwab’s Kevin Gordon framed this as a "digestion phase"—now almost routine during tech earnings seasons—noting that despite recent pullbacks, over two-thirds of tech stocks still trade above their 200-day moving averages. He cautioned, however, that broadening participation may face headwinds, particularly if the Fed delivers fewer rate cuts than expected or labor market weakness persists.