Wall Street's diversified strategies are rising strongly! A trend called "rotation" quietly begins in global stock markets.

In 2025, under the unprecedented AI investment boom sweeping global stock markets, a rather old-school collegiate stock trading strategy dominated by Wall Street investment institutions once again swept the market. This strategy, centered around index ETFs as core, focuses not only on popular tech stocks but also on diversifying stock assets by pursuing various market styles, sectors, and comprehensive bond assets. This diversification-focused strategy has performed exceptionally well throughout the year, especially outperforming the "Magnificent Seven" strategy (which only invests in the "seven big tech giants" in the US stock market) in the fourth quarter. However, in 2025, its shine was still entirely overshadowed by this wave of AI boom. Undoubtedly, by 2025, there were clear signs of market rotation from tech stocks to value and cyclical sectors. Therefore, this multi-asset strategy focusing on diversification has begun to achieve strong excess alpha returns in global stock markets, especially since the significant pullback of popular AI tech stocks like Oracle, Nvidia, and Broadcom in November. For 2026, as market sentiment regarding the AI bubble storm that occurred in November becomes more pessimistic, and doubts about the irrational formation and imminent bursting of the AI bubble grow, top Wall Street institutions such as Goldman Sachs and Morgan Stanley predict that the market rotation will continue to unfold in various styles including value stocks, small to mid-cap stocks, cyclical stocks, and different industry sectors outside of the tech industry. This implies that stocks other than popular AI tech stocks may achieve significantly higher annual investment returns. Goldman Sachs recently released a research report indicating that large tech companies that invest the most in the "AI arms race" may face highly uncertain investment returns for a considerable period. Goldman suggests that the AI story is now at the "epilogue's end" - meaning that the market phase where AI creates most of its value through AI big language models, and the bullish market sentiment on assets related to AI concepts, are likely coming to an end as market discernment of true beneficiaries becomes stricter. Various Wall Street institutions, including Goldman Sachs, Bank of America, Yardeni Research, and Morgan Stanley, have indicated in their annual summaries and outlooks that growing skepticism about high valuations of popular AI tech stocks and whether significant AI investments will bring substantial returns is driving the market to pay more attention to traditional cyclical sectors like industry and energy, as well as small to mid-cap stocks, instead of focusing on high-valued tech giants like Nvidia and Amazon. Yardeni Research founder Ed Yardeni recently suggested investors "reduce" their exposure to the "Magnificent Seven" tech giants relative to the rest of the S&P 500 index for the first time since 2010. Amidst the AI frenzy, the winners not to be overlooked in 2025 are those focusing on diversification. In the midst of the victorious AI narrative, hyper-inflated retail investor sentiment, and the rapid reversal of cryptocurrencies, a quieter trend emerged in the global stock market in 2025: investment strategies focused on diversified assets and multi-asset portfolios recorded the strongest investment returns in recent years, a feat largely overlooked. Firstly, a simple combination of stocks and bonds, each accounting for half, delivered double-digit gains, marking the best year since 2019. The "quantitative strategy cocktail" of multiple assets - a benchmark return index measuring a diversified portfolio that combines commodities, bonds, and global equities - significantly outperformed the S&P 500 index. Strategies focusing on multiple investment styles (such as value, cyclical, and tech) and various industry sectors seemed to have their strongest annual returns. A traded open-end index fund under Cambria Investments holding 29 ETFs covering global stock markets achieved its best annual performance ever, benefiting from substantial growth in overseas markets outside of the US. The significantly lower-than-expected US CPI inflation report released this week served as a lesson in the intelligence of these strategies. The inflation data announced on Thursday was significantly lower than expected, prompting rare simultaneous increases in stocks and bonds. The so-called risk-parity funds recorded strong gains this week, signaling that even in a world still enamored with the AI frenzy, the market environment still rewards "diversified allocation." However, while 2025-2026 may signal a return to the old-school Wall Street strategy of diversification, 2025 will also be remembered as another year where investors continued to move away from these strategies. Funds continued to flow into concentrated investments in popular AI tech stocks, including frontier tech themes such as nuclear power and quantum computing, alongside "direct risk hedging tools" like gold and silver. Underneath the surface, for most of the year, market breadth has been expanding, highlighting a shift of funds from popular AI tech stocks to other sectors. Value-oriented stock ETFs, many of which avoid overweighting in large tech sectors, attracted over $56 billion in funds this year, marking the second-largest annual net inflow since 2000. Cambria's Global Value Benchmark ETF's trading price rose by approximately 50% this year, marking its best performance since inception. International stock markets outside of the US rebounded under the stimulus of fiscal reforms and a weakening US dollar. Small-cap stocks significantly outperformed the S&P 500 index in the fourth quarter. The above chart shows that inflows into value funds unexpectedly outperformed growth ETFs, with this group attracting $56 billion in funds this year, marking the second-largest annual inflow since 2000. In 2026, a "great rotation" may fully unfold, ushering in a broader bull market. Top Wall Street strategists, including those from Goldman Sachs and Morgan Stanley, believe that this rotation from popular AI tech stocks to other sectors will continue into 2026. Greg Calnon, Co-Head of Public Investments at Goldman Sachs Asset Management, expects a broader range of US profit growth, with small to mid-cap stocks and international stocks focused on Europe and China outperforming the US market. He also believes that municipal bonds will continue to strengthen, supported by tax-adjusted yields more attractive than US treasuries and strong investor demand. Goldman Sachs Asset Management further suggests that global stock markets in 2026 will continue to experience a bull market, driven by a focus on boosting domestic economic growth amidst global populist sentiment and far-right forces. This will lead to a more diverse rotation of stocks globally, with investment opportunities moving beyond AI. They also indicate that the so-called "AI dividend" will spread from the core seven big tech giants to a wider range of areas. Goldman Sachs states that there were clear signs of sectoral rotation and market breadth widening in global stock markets in 2025, and this trend will continue in 2026, breaking the prior market focus on high concentration in AI tech stocks. Therefore, non-US and non-tech sectors are expected to continue to perform strongly under this rotation in 2026. David Lebovitz from J.P. Morgan Asset Management favors investments in emerging market bonds and UK gilts, while also maintaining selective exposure to US stocks and AI-related tech stocks. A recent report from Morgan Stanley indicates that the "big and beautiful" act passed by the Trump administration in 2025 will stimulate robust economic growth starting in 2026. Coupled with temporary inflation disturbances from Trump's tariff policies, and the ongoing construction of AI infrastructure projects by tech giants such as Google, the US economy is poised for a "gentle landing" of moderate growth in 2026. Therefore, Morgan Stanley defines 2026 as a "broad-based stock market bull market under a rolling recovery," with expectations that the S&P 500 index could reach 9,000 points. They advocate for a return of market risk preferences from a point perspective and resonance in multiple cyclical industries in light of the "US economic soft landing + rolling recovery" investment theme in 2026. The latest research report from the Morgan Stanley strategist team led by Michael Wilson suggests that the current stock market is at the beginning of a new profit cycle and a structural bull market. They anticipate that the core leadership in the US stock market in 2026 will transition from large-cap tech stocks benefiting from AI like Nvidia and Microsoft to small to mid-cap and cyclical core sectors. The Morgan Stanley strategists emphasize that under the investment theme of "US economic soft landing + rolling recovery," cyclical stocks (especially strong cyclical industries like industrials, finance, consumer discretionary, and healthcare) are set to benefit across the board, significantly outperforming the average benchmark performance of the past two to three years. Morgan Stanley states that the US stock market has exited a three-year "rolling recession" and formally entered a "rolling recovery" phase, where compressed cost structures, strong earnings revisions, significant improvements in corporate leverage, and suppressed demand release together constitute a "typical early cycle" environment. From a macro perspective, Morgan Stanley predicts that the Fed's path to rate cuts will initiate a new capital expenditure cycle, with real interest rates returning to normalcy, and corporate investments (especially in AI and manufacturing) becoming new growth engines. Another major Wall Street firm, Bank of America, released a report indicating that the "hot" economic policies Trump's administration will implement to maintain support will make going long on commodities the best trading theme in 2026. The trend charts of all major commodities will ultimately follow an upward trend similar to that of gold. The strategist team at Bank of America, led by Michael Hartnett, who is regarded as having the most accurate forecasts on Wall Street, asserts that this judgment is based on the global economy transitioning from the post-financial crisis model of "monetary easing + fiscal austerity" to a new investment paradigm of "fiscal easing + deglobalization" post-pandemic. Within this rotational trend, cyclical sectors exhibit the best relative upside potential. Although some investors have abandoned the classic 60/40 bet, the market has not given up on multi-asset allocation. Funds are flowing into alternative assets - from private credit and infrastructure to hedge funds and digital assets - as investors seek private exposures beyond public markets. In some cases, this search is no longer primarily about "portfolio balancing," but about pursuing alternative assets and similar "off-balance sheet" returns that are isolated from market fluctuations.