U.S. stock funds are shifting from tech giants to value sectors such as banking and industrials, but tech stocks still dominate profit growth. The Q4 earnings season will test whether this rotation can continue, with corporate guidance being a key factor. This article is sourced from Wallstreet.cn and compiled and written by Foresight News.
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Table of Contents

• Tech stocks still lead profit growth
• Rotation trading faces high expectations test
• Policy stimulus provides support

The current U.S. stock market is experiencing significant capital rotation, with funds moving away from the tech giants that led the market over the past three years toward banks, consumer goods, and materials producers. Investors are betting that these traditional sectors will benefit from the expected acceleration of the U.S. economy in 2026.

However, this rotation strategy is facing the reality of the earnings season. As the Q4 earnings season kicks off, large tech companies are still expected to be the main engine of the S&P 500’s overall profit growth. According to U.S. bank data, the tech sector is projected to achieve a 20% year-over-year profit growth, while non-tech sectors may see growth slow sharply from 9% to just 1%.

Piper Sandler Chief Investment Strategist Michael Kantrowitz said:

“Guidance will be an important signal. This is the first time at the start of the year that we have broadly benefited from stimulus policies, which are crucial for creating sustainable profit expansion.”

Tech stocks still lead profit growth

Although recent market funds show signs of rotation from tech stocks to value stocks, many institutional profit forecasts indicate that tech stocks will still dominate profit growth in the coming year.

Bloomberg industry research led by analyst Wendy Soong estimates that the profit growth rate of the S&P 500 value stock portfolio will be about 9%, which is only one-third of the projected growth rate of growth stocks. As the core component of the growth stock index, the tech sector’s profit growth is expected to reach as high as 30%.

Despite the significant gap in growth rates, traditional economic sectors are not without bright spots. Bloomberg industry data shows that industrial companies’ profits are expected to grow by 13%, and non-essential consumer goods and services companies are expected to grow by 12%.

Additionally, defensive sectors such as healthcare, materials, and essential consumer goods are also expected to approach 10% growth. This indicates that while tech giants lead growth, some traditional industries can still provide solid profit support.

Rotation trading faces high expectations test

After years of tech stocks dominating the market, the current rotation into traditional sectors cannot be ignored. The Federal Reserve’s easing cycle has opened new opportunities for economically sensitive industries, while traders are questioning whether AI themes can sustain ultra-high valuations, prompting fund managers to withdraw from long-term leading tech giants and seek more diversified allocations.

Data from Deutsche Bank confirms that this trend is accelerating. Overall holdings in large-cap growth and tech stocks continue to decline, while small-cap exposures have risen to their highest level in nearly a year. Looking at sector fund flows, last week, funds specifically investing in tech stocks saw a net outflow of nearly $900 million, while other sectors attracted a net inflow of $8.3 billion, with materials, healthcare, and industrial sectors performing most prominently.

Miller Tabak + Co. Chief Market Strategist Matt Maley said:

“This earnings season is crucial for the 493 companies in the S&P 500 excluding the ‘Big Seven’ tech giants, as well as for small caps. Market expectations have been driven higher, so the performance thresholds are also set quite high.”

He added that although institutional investors are still overweight in tech stocks after reducing their holdings, they are actively looking for the next rotation. Therefore, even if corporate earnings just meet expectations, it could trigger more significant internal capital rotation in the stock market.

Policy stimulus provides support

Piper Sandler Chief Investment Strategist Kantrowitz explicitly states that he is most optimistic about cyclical sectors such as transportation, housing-related industries, and manufacturing. He pointed out:

“The Federal Reserve’s easing policies, falling oil prices, and relaxed lending standards all bring potential tailwinds to the relatively weak ‘K-shaped’ lower half of the economy.”

These policy combinations are seen as key drivers supporting a profit recovery in non-tech sectors. Investors are betting that, with these positive factors stacking up, the U.S. economy is expected to accelerate growth in the first half or even the whole year of 2026, thereby boosting the performance of traditional cyclical industries beyond the high valuations of tech stocks.

However, the sustainability of market rotation requires fundamental validation. Companies must provide strong guidance to justify the flow of funds out of tech stocks. Over the past few years, market gains have been mainly supported by a few AI-related giants; now, the market needs to see broader and more solid profit growth to support overall valuations and sustain the current rotation trend.