Rotation nation

The tech sector has surged 300% over the past three years, and skepticism is mounting over whether Big Tech can continue to justify its sky-high valuations and massive AI spending. That’s why Wall Street strategists are increasingly encouraging investors to look beyond the Magnificent Seven and toward other parts of the market.

Many strategists expect this “great sector rotation” to take shape in 2026. Early signs of this shift are already emerging: stretched tech valuations are cooling investor appetite, and capital is flowing toward undervalued cyclicals, small-caps, and economically sensitive stocks as traders position for stronger growth this year.

Let’s take a closer look at some of those top sector picks:

Industrials

Industrial stocks face near-term pressure from a slowing US manufacturing sector and a soft housing market, which could weigh on demand for building products. But the outlook is far from bleak: heavy electrical equipment makers, such as producers of large gas turbines capable of powering data centers, stand to benefit from surging electricity needs driven by AI. Goldman Sachs expects a sharp rebound, forecasting industrial EPS growth to accelerate from 4% to 15% in 2026.

Power & Utilities

After decades of sluggish growth, US electricity demand broke out in 2025, exceeding the assumptions in many utility plans. AI training workloads and electrification in transportation and industry are driving the surge. Deloitte projects peak demand will rise roughly 26% by 2035, straining the grid—and giving power providers an excellent opportunity to profit.

Healthcare

Healthcare stocks were weighed down by policy uncertainty this year, particularly around the “most favored nation” drug pricing proposal. But recent agreements between Pfizer and the Trump administration have eased some of these fears and set a framework other companies may follow. As policy risks decline, sentiment and valuations have improved, helping healthcare become the best-performing sector in Q4 2025.

Earnings momentum is also improving: healthcare companies beat Q3 expectations by 13%, well above the market’s 7%, and the sector’s earnings revisions have stabilized for the first time in years. JPMorgan argues this sets up a more supportive backdrop for 2026 earnings growth.

Tech isn’t going anywhere, but the so-called boring sectors might be where the real action is this year.—SY