By Jack Hough

Is this a stock market rotation or a county fair Tilt-a-Whirl? I'm regretting that corn dog either way.

Metals are soaring. Crypto has crashed. Artificial-intelligence stocks are down, but so are perceived AI victims, so either a) the technology is overpriced but not overhyped, or b) we should think about powering the stock market off and then on again.

I'd call this a sector rotation, if boring were a sector. A screen for this year's top-performing S&P 500 index members brings up a who's who of wait, what? Bunge Global, a soybean squeezer, is up 37%; Dow, which makes polyethylene, the most exciting part of milk jugs, 35%; Smurfit Westrock, a big name in cardboard boxes, 34%; Church & Dwight, baking soda, 22%; and Lamb Weston, frozen french fries, 17%. What I wouldn't give for a fingernail clipper pure play with a decent dividend.

It's important to precisely define and label this market shift -- how else can I claim to have seen it coming all along, while waffling about what happens next? The technical strategists at J.P. Morgan call it a pro-cyclical rotation, meaning that it's driven by economically sensitive stocks. Fair enough: There goes Deere, up 42% this year; Caterpillar, 33%; and Stanley Black & Decker, 21%. In the U.S. in January, a survey-based leading indicator called the Purchasing Managers' Index, or PMI, ticked up to a level that indicates expanding manufacturing for the first time in a year.

That might just be postholiday reordering. Also, last year, U.S. manufacturing shed 68,000 jobs. So until I see more data, I'm clapping for the new PMI reading, but not making noise, like at a high school basketball game when they announce the other team's starting five. Anyhow, JPM estimates that economically sensitive stocks have already risen to levels that anticipate much higher global PMI levels, so if you sneezed you might have missed the rally, or as they put it, "we think it is unwise to press pro-cyclical trades at current levels."

Barclays sees a temporary shuffling of sector and factor leadership. For sectors, tech and financials fell off, while staples, energy, and materials soared. Staples explains the rally in milk jugs and french fries. In energy and materials, Exxon Mobil and gold miner Newmont are both up about 25% this year. For Exxon, that's a change, and for Newmont, a continuation -- it has more than tripled over two years.

For factors, value has beaten growth, small companies have raced ahead of large, and dividends have shined. Vanguard Value, an exchange-traded fund, has returned 8% year to date, beating its growth counterpart by 13 points. The iShares Core S&P Small Cap ETF has returned 9%, and the Schwab US Dividend Equity, 15%. By the way, overseas markets have continued last year's comeback. Vanguard Total International Stock ETF has returned 9% this year, while the S&P 500 is flat.

If I had to sum up recent market action with a film title, I might pick the 2022 absurdist award-winner Everything Everywhere All at Once . Investors have read for years that AI stocks look stretched, and that value stocks, or small-caps, or dividends, or overseas markets are due. They've suddenly decided that all of it sounds about right, and must now be addressed simultaneously and immediately, in an act of violent prudence. By the way, I read that when that movie opened in Hong Kong, the name translated to: Weird Woman Warrior [expletive]s Around and Saves the Universe. That one doesn't seem as applicable to the stock market, but let's see what the rest of February brings.

As for what to do now, some observations: First, flat isn't so bad for a stock index having an identity crisis. For S&P 500 fundholders, of whom there are many, the stuff that's working is offsetting the stuff that's not, at least for now. Second, Barclays notes that the value rally has been driven by expanding valuations, not better earnings growth, and that for small-caps, the trend in earnings revisions has weakened. Meanwhile, economist Ed Yardeni recently pointed out that the so-called Magnificent Seven tech stocks were down to 25.8 times forward earnings from a September 2020 peak of 38.1 times. That compares with 21.8 times recently for the broader S&P 500. The Mag 7 premium is "arguably justified," in Yardeni's view, given that the group is expected to grow earnings by 22.8% in the year ahead, versus 12.9% for the Mag-less S&P 493.

I wonder if that makes it late to pile into value stocks and small-caps. The risk is that the weaker ones that have been pulled up with the group suddenly reverse course -- or reverse Coors, you might say. Brewer Molson Coors, which has lost shareholders money for a decade, was up 16% year to date through Feb. 12. But just as shareholders were humming the opening bars to "Rocky Mountain High," the company predicted a sharp drop in this year's profit, and the stock gave back nearly all of its gains. Meanwhile, Vanguard Value goes for 17.2 times this year's projected earnings, which is a discount to the S&P 500's current valuation, but a premium to its historical one.

For investors who wish to complement their S&P 500 funds and who lack international diversification, adding some now still seems a safe bet. That aforementioned Vanguard international ETF, ticker VXUS, doubles as a value fund, at 15 times this year's earnings, and triples as a currency hedge, should the dollar continue the past year's slide.

Finally, I remain a dividend fetishist, even if polite financial society frowns upon my kink. The Schwab ETF previously mentioned, SCHD, still yields 3.4%, which is triple what the S&P 500 pays. It, too, is decidedly tilted toward value, trading at 16.1 times earnings. Plump quarterly payments are relatively scarce, so the fund's top holdings cover mostly familiar ground: oil, soda, fighter jets, pills, cigarettes, and for those with the moral flexibility for it, phone service.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 20, 2026 13:44 ET (18:44 GMT)

Copyright (c) 2026 Dow Jones & Company, Inc.