Wall Street's "2026 US Stock Theme" is rotation! "Old Deng" outperforms Mag 7, Goldman Sachs exclaims "Cyclical stocks have not been fully priced in yet"

As 2026 approaches, Wall Street is forming an increasingly clear consensus: the tech giants that have led the bull market in recent years may step aside, and market rotation will become the main theme of investment in the new year.

According to Bloomberg, strategists from several major Wall Street firms, including Bank of America and Morgan Stanley, are advising clients to focus more on traditional sectors such as healthcare, industrials, and energy in their 2026 investment portfolios, rather than the "Magnificent Seven" tech giants like Nvidia and Amazon. Behind this shift is a growing skepticism about the high valuations of tech stocks and the massive returns on AI investments.

The change in market sentiment is already traceable. Recently, earnings reports from AI bellwethers like Oracle and Broadcom failed to meet the market's extremely high expectations, exacerbating investor concerns. Meanwhile, fund flows indicate that investors are shifting from tech giants to lower-valued cyclical stocks, small-cap stocks, and economically sensitive sectors. Since the market hit a short-term low on November 20, the Russell 2000 small-cap index has risen by 11%, while the "Magnificent Seven" index's gains have been only half of that.

Goldman Sachs provided a deeper analysis of this rotation trend in its latest report released on December 12. The firm's strategists pointed out that although cyclical stocks have rebounded significantly recently, the market has not fully digested the economic outlook that may emerge in the U.S. in 2026. Goldman predicts that U.S. GDP growth will reach 2.5% next year, higher than the market consensus of 2.0%, and believes this indicates that cyclical sectors still have room for upward movement.

Goodbye to Tech Stocks? Valuation and Growth Concerns Emerge

For years, investing in large tech companies seemed like an unquestionable choice. However, after an astonishing increase of about 300% over the past three years, the market is beginning to question whether this sector can continue to justify its high valuations.

Craig Johnson, chief market technician at Piper Sandler & Co., stated, "I hear people are pulling money out of the 'Magnificent Seven' trades and putting it into other areas of the market. They are no longer just chasing Microsoft and Amazon, but are broadening this trade."

According to Bloomberg, senior strategist and founder of Yardeni Research, Ed Yardeni, also advised investors this week to reduce their holdings in large tech stocks relative to the rest of the S&P 500, marking his first change in stance on the overweight position in information technology and communication services since 2010. This series of viewpoint shifts reflects Wall Street's cautious attitude toward the future growth path of tech stocks.

The "Great Rotation" is Underway

The market has not waited for strategists' calls; the fund rotation has quietly occurred. Data shows that since November 20, not only has the Russell 2000 index performed well, but the equal-weighted S&P 500 index, which better reflects market breadth, has also outperformed its market-cap-weighted index during the same period.

Jason De Sena Trennert, chairman of Strategas Asset Management LLC, believes that 2026 will see a "Great Rotation" towards sectors like financials and consumer discretionary that have lagged this year Morgan Stanley's Chief U.S. Equity Strategist Michael Wilson holds a similar view, predicting that market breadth will expand. Wilson stated, "We believe that large tech stocks can still perform well, but they will lag behind new leading sectors, especially consumer goods and small to mid-cap stocks."

Bank of America strategist Michael Hartnett mentioned in a report last Friday that the market is positioning itself for the 'run-it-hot' strategy for 2026, with funds rotating from 'Wall Street giants' to small and micro-cap stocks representing 'Main Street.'

Goldman Sachs: Economic Outlook Not Fully Priced In by the Market

Goldman Sachs' report provides a solid macro foundation for a bullish outlook on cyclical stocks. The strategy team led by Ben Snider explicitly pointed out in the December 12th report "US WEEKLY KICKSTART" that "the cyclical acceleration for 2026 has not yet been fully priced in."

The core argument of the report is that, despite cyclical stocks setting a record performance relative to defensive stocks over 14 consecutive trading days, the market's pricing of economic growth remains conservative, roughly in line with economists' consensus of 2.0% growth. In contrast, Goldman Sachs economists are more optimistic, predicting that under the influence of looser financial conditions and fiscal policies like the "One Big Beautiful Bill Act," the average growth rate of U.S. real GDP will reach 2.5% in 2026.

The report suggests that this expectation gap provides opportunities for cyclical assets. Internal sector rotation and cross-asset patterns indicate that the market's pricing has not fully reflected the economic vitality anticipated by Goldman Sachs.

Where Are the Opportunities? Goldman Sachs is Bullish on the Non-Residential Construction Sector

In the context of economic acceleration, which sectors have the greatest potential? Goldman Sachs' report specifically highlights non-residential construction-related stocks.

The report analyzes that these stocks have underperformed over the past two years due to weak earnings. Since mid-2024, U.S. non-residential construction activity has shown negative year-on-year growth. However, looking ahead to 2026, the situation is expected to improve. Investment incentives included in the fiscal bill, along with the rebound of forward-looking indicators such as the Dodge Momentum Index and Federal Reserve surveys, all signal a more favorable environment.

From a broader fundamental perspective, the rotation is also supported by data. According to Goldman Sachs, the earnings growth of the "S&P 493" constituents, excluding the seven giants, is expected to accelerate from 7% this year to 9% in 2026, while the contribution of the seven giants to S&P 500 earnings will decrease from 50% to 46%. Michael Bailey, Research Director at FBB Capital Partners, stated that if employment and inflation data remain stable and the Federal Reserve continues to ease policies, the "S&P 493" could see a bullish trend next year.

Despite the optimistic outlook, risks cannot be overlooked. Goldman Sachs' report emphasizes that the key risk facing cyclical stocks is disappointing economic growth. For non-residential construction-related companies, a further decline in construction activity would be a major threat Another major risk comes from the sharp rise in interest rates. The report points out that history shows when the 10-year U.S. Treasury yield rises more than two standard deviations (currently about 50 basis points) within a month, the stock market typically faces selling pressure. This means that if the 10-year Treasury yield jumps to over 4.5% in the short term, investors should remain vigilant