U.S. investors are showing early signs of rotating out of mega-cap technology names and into cyclical and value sectors, as steady economic data and resilient consumer spending encourage bets on a broader earnings recovery heading into 2026. Futures ahead of Friday's open indicate modest gains for the Dow Jones Industrial Average, while S&P 500 contracts were flat and Nasdaq 100 futures eased slightly, suggesting that traders are rebalancing portfolios rather than chasing this year's AI-led momentum.
Data from EPFR Global showed that in the week through Wednesday, U.S. value funds attracted $3.2 billion in net inflows, their largest since January 2022, while growth funds saw $1.1 billion in outflows. The rotation was led by renewed demand for financials, industrials, and energy stocks, sectors that stand to benefit if the economy maintains moderate growth and the Federal Reserve delays aggressive rate cuts.
Corporate fundamentals support this shift. Analysts now expect S&P 500 earnings growth of roughly 9 percent year-over-year in the fourth quarter, with projections for financials and industrials revised higher by nearly two percentage points in the past month. The energy sector, supported by firm oil demand and disciplined supply, is showing profit resilience with consensus forecasts up 6 percent since mid-October.
Markets are likely to test this rotation trend on Friday as U.S. yields remain stable and the dollar holds near a three-week high. While technology giants still dominate market capitalization, high yields make dividend-paying and value-oriented stocks increasingly attractive.
Breadth metrics indicate healthier participation, with 61 percent of S&P 500 members trading above their 50-day moving averages compared with 48 percent a month ago. Small-cap stocks, represented by the Russell 2000, are on track for their best weekly relative performance against the Nasdaq since May.
Investors will monitor whether this rotation gains momentum into year-end. If bond yields remain contained and earnings revisions hold, the market could transition from an AI-dominated rally to a more balanced expansion, potentially making the 2025 uptrend more durable as it enters its final stretch.
