After technology stocks, who will take the lead in the 2026 US stock market? Wall Street's answer: cyclical stocks

With the fall in oil prices, the US economic growth is expected to accelerate, while continuous cooling of inflation has strengthened expectations of a rate cut by the Federal Reserve. At the same time, stock pickers are shifting their focus beyond artificial intelligence (AI) concept stocks, and the US consumer market continues to maintain robust consumption vitality. These factors together constitute nearly a perfect favorable environment for the most economically sensitive listed companies. Therefore, strategists and analysts expect that companies like JPMorgan Chase (JPM.US) and other banks, Caterpillar Inc. (CAT.US) and other equipment manufacturers, as well as Gap (GAP.US) and Dollar Tree, Inc. (DLTR.US) and other retailers, will perform well in 2026. Michael Kantrowitz, Chief Investment Strategist and Head of Portfolio Strategy at Piper Sandler, said, "Investors have begun to detect initial signs of an upturn in cyclical sectors." This means that financial, industrial, and non-essential consumer goods suppliers are expected to be the leading forces in the US stock market, as anticipated by Wall Street for another strong year. About 60 economists surveyed predict that the US economy will grow at an average of 2% next year - although not strong, this growth is enough to drive sectors outside the technology sector to rise. Kantrowitz added, "As economic data improves, value stocks may outperform the market in 2026. We should position ourselves early in assets that are expected to have marginal improvement in earnings next year." In fact, the trend of market style switching has quietly emerged. The cyclical stock basket compiled by Goldman Sachs Group, Inc. has performed roughly in line with the S&P 500 index throughout the year, but its cumulative increase in the past month has reached 9.3%, which is twice the 4.2% increase in the S&P 500 index. Furthermore, the performance of cyclical stocks has also surpassed defensive stocks. During the style shift triggered by the tech sector pullback in October and November, defensive stocks were the biggest beneficiaries. Another trading strategy by Goldman Sachs Group, Inc. - long on non-commodity cyclical stocks and short on defensive stocks - has also yielded a 10% return in the past month. Sam Stovall, Chief Investment Strategist at CFRA, stated in a report to clients, "Funds flowing into non-tech cyclical stocks demonstrate the market's optimistic expectation for economic expansion." The firm predicts that the US real GDP will grow by 2.5% in 2026, "benefiting from a 4.1% increase in retail sales, as well as a drop in the core personal consumption expenditure (PCE) price index to 2.4%. Numerous Wall Street institutions believe that the strong performance of cyclical stocks has long-term sustainability. Dennis DeBusschere, Founder and Chief Market Strategist of 22V Research LLC, said, "The window of opportunity for cyclical trading will not be limited to just one or two quarters." His core investment strategy is long on banks and retail stocks, short on consumer essentials stocks, while also bullish on transportation stocks outside of the airline sector. The trend of the Dow Jones Transportation Average Index also confirms the strengthening logic of cyclical stocks. The index has risen by 10% in the past month, and after a long period of poor performance, it is now only 0.4% away from breaking the historical high set in November 2024. Tom Hainlin, Chief Investment Strategist at US Bank NA, advised clients to increase exposure to cyclical stocks in their stock portfolios. In a phone interview, he said, "We want to increase exposure to cyclical stocks, but we will not achieve this goal by selling tech stocks." He expects that the technology sector will continue to lead earnings growth in 2026, with the materials and industrial sectors following closely behind. A team of Citi strategists led by Adam Pickett stated in a report on December 15th that cyclical stocks will outperform defensive stocks and recommended investors to overweight the financial sector - their top pick in cyclical sectors, while underweighting the consumer essentials sector. The report also mentioned, "The industrial sector also has the potential for upward rating adjustments." However, Pickett also warned that the path of cyclical stocks rising in 2026 will not be without obstacles. If the US economy overheats, it may delay the expected rate cut measures, or even lead to policy shifts. He emphasized, "It is far from certain whether the Federal Reserve will continue to cut rates by the end of 2026." Data shows that the market currently expects the Federal Reserve to cut rates twice in 2026. The Fed's latest forecast also shows that the US GDP growth rate will reach 2.3% in 2026, up from the 1.8% expected in September. Michael Dickson, Director of Research and Quantitative Strategies at Horizon Investments LLC, stated in a client report, "The accelerated US economic growth will significantly benefit cyclical companies and sectors, as the performance of these assets is highly correlated with the level of economic activity."