Big Tech vs Value Stocks! The earnings season for U.S. stocks is coming, and Wall Street's "rotation trade" faces a critical test

The current U.S. stock market is experiencing significant capital rotation, with funds shifting from the technology giants that have led the market for the past three years to banks, consumer goods, and materials producers. Investors are betting that these traditional sectors will benefit from the anticipated acceleration of the U.S. economy in 2026.

However, this rotation strategy is facing the reality test of earnings season. As the fourth-quarter earnings season kicks off, large technology companies are still expected to be the main engine of overall profit growth for the S&P 500 index. According to Bank of America data, the technology sector is expected to achieve a year-on-year profit growth of 20%, while the growth rate for non-technology sectors may slow significantly from 9% to just 1%.

Piper Sandler's Chief Investment Strategist Michael Kantrowitz stated:

"Earnings guidance will be an important signal. This is the first time we have received broad stimulus policy tailwinds at the beginning of the year, which is crucial for creating sustainable profit expansion."

Technology Stocks Still Dominate Profit Growth

Despite recent signs of capital flowing from technology stocks to value stocks, earnings forecasts from multiple institutions indicate that technology stocks will still hold an absolute dominant position in profit growth over the next year.

The Bloomberg Industry Research team, led by analyst Wendy Soong, expects the profit growth rate for the S&P 500 value stock portfolio to be around 9%, which is only one-third of the expected growth rate for growth stocks. The technology sector, as a core component of the growth stock index, is expected to see profit growth as high as 30%.

Despite the significant growth rate gap, traditional economic sectors are not without highlights. Bloomberg Industry Research data shows that profits for industrial companies are expected to grow by 13%, while the growth rate for non-essential consumer goods and services companies is expected to be 12%. Additionally, defensive sectors such as healthcare, materials, and essential consumer goods are also expected to see growth rates close to 10%. This indicates that while technology giants lead growth, some traditional industries can still provide robust profit support.

Rotation Trading Faces High Expectations Test

After technology stocks dominated the market for several consecutive years, the current scale of rotation towards traditional sectors cannot be ignored. The Federal Reserve's entry into a rate-cutting cycle has opened new opportunities for economically sensitive industries, while traders have raised doubts about whether the artificial intelligence theme can continue to support extremely high valuations, prompting fund managers to withdraw from the long-leading technology giants in search of more diversified allocations.

Data from Deutsche Bank confirms that this trend is accelerating. The overall holdings of large-cap growth stocks and technology stocks continue to decline, while exposure to small-cap stocks has risen to its highest level in nearly a year. In terms of industry capital flows, nearly $900 million net flowed out of funds specifically investing in the technology sector last week, while other sectors attracted a net inflow of $8.3 billion, with materials, healthcare, and industrial sectors performing the best.

Miller Tabak + Co.'s Chief Market Strategist Matt Maley pointed out:

“This earnings season is crucial for the other 493 companies in the S&P 500 index, excluding the 'Seven Giants of Technology,' as well as for small-cap stocks. Market expectations have been elevated, so the performance threshold has also been set very high.” He added that although institutional investors remain overall overweight in technology stocks after reducing their holdings, they are actively seeking the next direction for "rotation." Therefore, even if corporate earnings merely meet expectations, it could trigger more significant capital rotation within the stock market.

Policy Stimulus Provides Support

Piper Sandler's Chief Investment Strategist, Craig Johnson, clearly stated that he is currently most optimistic about cyclical sectors such as transportation, housing-related, and manufacturing. He pointed out:

"The Federal Reserve's accommodative policies, falling oil prices, and relaxed lending standards have all provided potential tailwinds for the relatively weak 'K-shaped' lower half of the economy."

This combination of policies is seen as a key driving force supporting the earnings recovery of non-tech sectors. Investors are betting that under the cumulative effect of these favorable factors, the U.S. economy is expected to achieve accelerated growth in the first half of 2026 or even for the entire year, thereby driving the performance of traditional cyclical industries to surpass that of overvalued technology stocks.

However, the sustainability of market rotation urgently requires fundamental verification. Companies must provide strong earnings guidance to justify the outflow of funds from technology stocks. Over the past few years, the market's gains have primarily been supported by a few AI-related giants; now, the market needs to see broader and more solid earnings growth to support overall valuations and sustain the current rotation trend