- ^GSPC -0.53%
Photographer: Michael Nagle/Bloomberg (Bloomberg) -- Investors’ newfound affinity for companies that benefit most from an accelerating economy is in for a tough test as the latest earnings season kicks off.
Money has been flowing from the technology giants that powered the past three years of gains into shares of banks, consumer-product makers and materials producers. The bet is that these sectors are set to outperform as the US economy picks up steam in 2026.
Most Read from Bloomberg
-
Why the Renovation of Federal Reserve Headquarters Costs $2.5 Billion
-
New Design Plans Revealed for White House Ballroom
-
Summit Properties Wins Auction for Bankrupt NYC Apartments
-
The Latest Brand of Tech City Dreams: Virtual Residents
-
In Birmingham, a Stadium Plan Shows UK Football’s Flashy Side
The problem for any jittery investors is that Big Tech is still poised to be the dominant contributor to fourth-quarter profit growth among S&P 500 Index firms. Tech firms in the index are estimated to show year-over-year earnings growth of 20%, while non-tech earnings expansion is slated to decelerate from 9% to just 1%, according to data from Bank of America Corp.
That will put a huge onus on forecasts from the likes of Caterpillar Inc., Procter & Gamble Co. Investors will need Corporate America to essentially reiterate what much of Wall Street is predicting: the American economy is slated for a burst in the first half, if not the full year.
“Guidance will be an important tell,” said Michael Kantrowitz, chief investment strategist at Piper Sandler & Co., whose favorite industries are transports, housing-related, and manufacturing. “This is the first start to the year that we’ve got broad stimulus tailwinds, which are necessary to create a sustainable broadening of earnings.”
The stock market, famously, reflects expectations for the near future, and going by trading since the start of November, investors expect the corporate chieftains to be optimistic about growth prospects. Small caps and so-called value stocks have been in favor, traditionally signs of confidence in the US economy. The Russell 2000 Index has outperformed the S&P 500 for seven straight days, a streak last exceeded in January 2019.
Those trades are likely to be tested, going by Bloomberg Intelligence’s forecasts for earnings in the coming year. Analysts led by Wendy Soong expect the S&P 500 Value cohort to grow profits by 9%, one third the rate of expansion among growth stocks. Tech — the biggest part of the growth index — is the runaway leader, with profit expansion forecast at 30%.
There are reasons for confidence though. Industrial firms in the S&P 500 should push profits higher by 13%, while companies that make discretionary consumer products and services are slated for 12% growth. Health care, materials and consumer staples firms will also serve up gains nearing 10%, according to BI data.
Story Continues“Federal Reserve easing, lower oil prices, easier lending standards, and the One Big Beautiful Bill are among potential tailwinds for the lower ‘K’ part of the economy and stock market,” Piper’s Kantrowitz said.
JPMorgan Chase & Co. said on Tuesday its investment-banking fees unexpectedly fell in the fourth quarter, missing the firm’s own guidance from just last month. Shares were down 3% as of 10:23 a.m. in New York. The S&P 500 fell 0.4%.
Robust forecasts will be needed to justify a rotation from tech that is notable after years that saw a handful of megacap AI firms do the heavy lifting. The Fed’s monetary easing has reopened the case for economically sensitive sectors at a time when traders are questioning the durability of the artificial intelligence trade, prompting money managers to diversify away from the bull market’s longtime winners.
Investors are leaning into the rotation. Positioning in megacap growth and technology has continued to drift lower, while small-cap exposure is now at its highest in almost a year, according to data from Deutsche Bank AG, which pointed to the rotations evident in recent fund flows. Across dedicated sector funds, tech bled money, with nearly $900 million leaving the sector last week, while other industries gained $8.3 billion, led by materials, health care and industrials.
“The emergence of several new geopolitical issues could have a big impact on the markets. However, this earnings season is going to be critical for the S&P 493 as well as the small-cap stocks,” said Matt Maley, chief market strategist at Miller Tabak + Co. “The expectations are quite high for these earnings, so the bar has been set pretty high.
That said, he added, with institutionals still mostly overweight tech even after trimming positions, they are on the hunt for areas to ‘rotate’ toward. “Therefore, if the earnings merely meet expectations, it should lead even more rotation in the stock market.”
(Updates with details on JPMorgan’s earnings in 10th paragraph.)
Most Read from Bloomberg Businessweek
-
I’ve Studied How Democracies Fail. Here’s My Unified Theory of Trump
-
The Curious Cult of Aldi
-
Inside the White House, Stephen Miller Is Making His Vision of America Real
-
This Is Who Companies Call When They Want to Become a Bank
-
The Economic Toll of Trump’s Policies Will Soon Be Visible
©2026 Bloomberg L.P.
Terms and Privacy Policy Privacy Dashboard More Info
