U.S. stock market sees a big turnaround at the end of the year! Wall Street bets on economic recovery in 2026 and goes on a buying spree for stagnant sectors.

For stock traders, December is usually the so-called "window dressing" period - adding positions in stocks that have performed well throughout the year, and selling off underperforming assets to lock in yearly performance. However, this year is the opposite. Investors are pulling out of the technology giant camp - this year, these leading stocks have driven the S&P 500 index to a 17% increase for the year; at the same time, they are starting to heavily buy into high-risk small-cap stocks that have had a poor performance throughout the year, as well as individual stocks representing traditional sectors such as transportation. Since the U.S. stock market hit a short-term low on November 20th, the small-cap benchmark Russell 2000 Index has risen by 9.4%, reaching a historical high on Thursday; the micro-index has risen by 12%; and sectors highly correlated with economic cycles such as truck transportation, shipping, and Airlines have achieved an 11% increase, recording gains for several consecutive trading days. During the same period, the S&P 500 index has only seen a 5.1% increase. Behind this shift in positions is a market questioning the "AI hot trend boosts tech stocks" model. Tech giants such as NVIDIA Corporation and Microsoft Corporation have seen their upward momentum stagnate. At the same time, investors' optimistic expectations for the U.S. economy to accelerate recovery in the first half of 2026 are leading them to abandon growth and chase value, flocking into undervalued value stocks. Strategas Asset Management LLC recommends that clients should overweight the equal-weighted S&P 500 index compared to the traditional market capitalization-weighted version. The company's co-founder Jason De Sena Trennert points out that the market expects the Trump administration's tax legislation to boost consumer spending and corporate capital expenditures. In addition, the World Cup event is also expected to drive economic growth and expand corporate profit space next year. Trennert is not the only one holding this view. Bank of America Corp's Chief Investment Strategist Michael Hartnett advised clients last Friday to position themselves in undervalued mid-cap stocks in 2026. His core logic is that the White House is likely to implement interventionist policies to curb inflation levels and stabilize the unemployment rate. His team also pointed out that sectors highly correlated with economic cycles will see the best relative returns, including residential construction, retail, CareTrust REIT Inc, and transportation stocks. John Stoltzfus, the most optimistic forecaster among Wall Street strategists for the third consecutive year, also recommended allocating cyclical sectors tied to the economy in 2026. His top picks include communication services, industrial, financial, and discretionary consumer goods. His bullish logic is based on robust economic growth and loose monetary policy, predicting that the S&P 500 index will rise by 18% next year to around 8100 points. The market trends in November have already clearly shown the shift in the leading theme. In November, the equal-weighted S&P 500 index rose by 1.7%, while the traditional market capitalization-weighted version only increased by 0.3%. According to Bank of America Corp data, among the components of the S&P 500 index, the top 50 largest companies by market capitalization fell by 0.6% in November, while the remaining 450 small and mid-cap components increased by 1.3%. Against the backdrop of weak performance by large-cap tech stocks, healthcare, communication services, and materials sectors led the November market. The healthcare sector, with a 9.1% increase, became the best-performing sector in the S&P 500 index, while the information technology sector fell by 4.4%, ranking at the bottom. In terms of style factors, November saw value stocks outperforming growth stocks and other factor sectors across the board - marking a strong reversal for the underperforming value style in the first ten months of the year. Savita Subramanian, Stock and Quantitative Strategy Director at Bank of America Corp, said: "Momentum stocks also significantly underperformed the market, which may indicate a changing of the guard in the market leadership theme, gradually shifting away from previously perennially strong sectors to formerly stagnant picks." Last Friday, Scott Rubner, strategist at Citadel Securities, also told clients, "The market's internal rotation is ongoing." The Russell 2000 Index has significantly outperformed the S&P 500 Index and the Nasdaq 100 Index on multiple trading days. After the release of financial reports by tech giants last month, concerns about AI expenditure data triggered this round of rotation, allowing underperforming sectors for the year to catch up. Kevin Gordon, Head of Macro Research and Strategy at Charles Schwab Corp, analyzed: "This is part of the market's digestion and consolidation process, which has become almost customary in the past few years, especially during tech stock earnings seasons." Gordon also pointed out that despite a pullback, the tech sector's cumulative gain for the year remains substantial - over two-thirds of the sector's constituents are currently trading above the 200-day moving average. He added: "The spread of the market may continue, but the process won't be smooth sailing. Particularly considering the parts of the market sensitive to interest rates, they may come under pressure due to expectations that the Fed will not lower rates as much next year, and ongoing weakness in the labor market."