Wall Street's "2026 US stock theme" is rotation! "Old Dominion" surpasses Mag 7, Goldman Sachs exclaims "cyclical stocks have not been fully priced in yet"

As the year 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 from the center stage, and market rotation will become the new investment theme for the coming year. According to Bloomberg, strategists from several Wall Street giants including Bank of America Corp and Morgan Stanley are advising clients to focus more on traditional sectors such as healthcare, industrial, and energy in their investment portfolios for 2026, rather than on the "Tech Seven Giants" like NVIDIA Corporation and Amazon.com, Inc. This shift is driven by increasing doubts about the high valuations of tech stocks and the massive returns on AI investments. The change in market sentiment is becoming evident. Recent earnings reports from benchmark AI companies like Oracle Corporation (ORCL.US) and Broadcom Inc. (AVGO.US) have failed to meet the market's high expectations, intensifying investor concerns. At the same time, fund flows show that investors are shifting from tech giants to lower valuation cyclical stocks, small-cap stocks, and economically sensitive sectors. Since hitting a short-term low on November 20th, the Russell 2000 small-cap index has risen by 11%, while the "Tech Seven Giants" index has only increased by half that amount. Goldman Sachs Group, Inc. provided further insight into this rotation trend in a report released on December 12th. The bank's strategists pointed out that while cyclical stocks have rebounded significantly recently, the market has not fully priced in the economic outlook for 2026 in the United States. Goldman Sachs Group, Inc. predicts that next year, the U.S. GDP growth rate will reach 2.5%, higher than the market consensus of 2.0%, suggesting that cyclical sectors still have room to grow. Goodbye to tech stocks? Valuation and growth concerns emerge For years, investing in large tech companies seemed like an unquestionable choice. However, after experiencing a staggering 300% rally 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, said: "I'm hearing people are moving money out of trading the 'Tech Seven Giants' and into other areas of the market. They're broadening that trade beyond just Microsoft Corporation and Amazon.com, Inc." According to Bloomberg, veteran strategist and founder of Yardeni Research, Ed Yardeni, also advised investors this week to reduce holdings of large tech stocks relative to the rest of the S&P 500 index, marking his first shift in stance on the IT and communication services sectors since 2010. These shifts in viewpoints reflect Wall Street's cautious attitude towards the future growth trajectory of tech stocks. "The Big Rotation" is already underway The market has not waited for strategists' calls, and fund rotation has already silently occurred. Data shows that since November 20th, not only has the Russell 2000 index performed well, but equal-weighted indices such as the S&P 500, which better reflect market breadth, have outperformed their market-cap weighted counterparts during the same period. Jason De Sena Trennert, Chairman of Strategas Asset Management LLC, believes that there will be a "big rotation" towards sectors like financials and non-essential consumer goods that have underperformed this year in 2026. Michael Wilson, Chief U.S. Stock Strategist at Morgan Stanley, also shares a similar view, predicting that market breadth will expand. Wilson said, "We believe that large tech stocks will still perform well but will lag behind new leading sectors, especially consumer goods and mid-cap stocks." Michael Hartnett, a strategist at Bank of America Corp, noted in a report last Friday that the market is positioning for a "hot run" strategy for 2026, with funds rotating from the "Titans of Wall Street" to represent "Main Street" in mid-cap and micro-cap stocks. Goldman Sachs Group, Inc.: Economic outlook not fully priced in by the market Goldman Sachs Group, Inc.'s report provides a solid macro foundation for its bullish view on cyclical stocks. The strategy team led by Ben Snider explicitly stated in their "US WEEKLY KICKSTART" report on December 12th that "cyclical acceleration in 2026 has not been fully priced in." The core argument of the report is that despite cyclical stocks outperforming defensive stocks for a record 14 consecutive trading days recently, the market's pricing of economic growth is still somewhat conservative, roughly aligning with economists' consensus of 2.0% growth. However, Goldman Sachs Group, Inc.'s economists are more optimistic, believing that with the relaxation of financial conditions and the stimulus from fiscal policies like the "One Big Beautiful Bill Act," the average real GDP growth rate in the United States 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 both indicate that the market has not fully reflected the economic vitality expected by Goldman Sachs Group, Inc. Where are the opportunities? Goldman Sachs Group, Inc. bullish on non-residential construction sector In the context of accelerating economic growth, which sectors have the most potential? Goldman Sachs Group, Inc.'s report specifically highlighted stocks related to non-residential construction. The analysis in the report states that these stocks have performed poorly over the past two years due to weak earnings. Since mid-2024, non-residential construction activity in the United States has been negative year-on-year. However, looking ahead to 2026, the situation is expected to improve. Investment incentives included in fiscal bills, and leading indicators such as the Dodge Momentum Index and Federal Reserve surveys, all point to a more favorable environment. From a broader fundamental perspective, the rotation is also supported by data. According to Goldman Sachs Group, Inc.'s data, earnings growth for the "S&P 493" component stocks excluding the Big Seven is expected to accelerate from 7% this year to 9% in 2026, while the Big Seven's contribution to S&P 500 earnings will drop from 50% to 46%. Michael Bailey, Research Director at FBB Capital Partners, said that if employment and inflation data remain stable, and the Fed continues to ease policy, the "S&P 493" could experience a bullish run next year. While the outlook is positive, risks should not be overlooked. The Goldman Sachs Group, Inc. report emphasizes that key risks for cyclical stocks include disappointing economic growth. For companies related to non-residential construction, further declines in construction activity will be a major threat. Another significant risk comes from a sharp rise in interest rates. The report points out that historically, when the 10-year U.S. Treasury yield rises by more than two standard deviations within a month (currently equivalent to around 50 basis points), the stock market typically faces selling pressure. This means that investors should remain vigilant if the 10-year Treasury yield jumps above 4.5% in the short term. This article was originally published by "Wall Street Observation" and was edited by GMTEight: Jiang Yuanhua.