Big Tech vs. Value Stocks! US Earnings Season Arrives as Wall Street's "Rotation Trade" Faces a Crucial Test

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The current U.S. stock market is experiencing significant fund rotation, with capital flowing out of the technology giants that have led the market for the past three years and into banks, consumer goods, and materials producers. Investors are betting that these traditional sectors will benefit from expectations of accelerated U.S. economic growth in 2026.

However, this rotation strategy is facing the reality check of earnings season. As the fourth-quarter earnings season begins, large technology companies are still expected to be the main engine of overall profit growth for the S&P 500 Index. According to data from Bank of America, the technology sector is expected to achieve 20% year-over-year earnings growth, while the growth rate for non-technology sectors may slow sharply from 9% to just 1%.

Piper Sandler Chief Investment Strategist Michael Kantrowitz stated:

"Earnings guidance will be an important signal. This is the first time we’ve had broad policy stimulus tailwinds at the start of the year, which is crucial for generating sustainable earnings expansion."

Tech Stocks Still Lead Profit Growth

Although there have recently been signs of funds rotating from tech stocks to value stocks, earnings forecasts from several institutions indicate that technology stocks will continue to absolutely dominate profit growth over the coming year.

A team led by Bloomberg Industry Research analyst Wendy Soong estimates that the profit growth rate of the S&P 500 Value Stock basket will be about 9%, only a third of the expected growth rate of growth stocks. The technology sector, at the core of the growth index, is projected to achieve profit growth as high as 30%.

Despite the significant gap in growth rates, traditional economic sectors are not without highlights. According to Bloomberg Industry Research, industrial companies are expected to grow profits by 13%, and the growth rate for consumer discretionary and services companies is estimated at 12%. Additionally, defensive sectors such as healthcare, materials, and consumer staples are projected to approach growth rates of 10%. This shows that while tech giants lead growth, some traditional industries still provide solid profit support.

Rotation Trades Face High Expectations

After years of technology stocks dominating the market, the current scale of rotation into traditional sectors can’t be ignored. The Federal Reserve’s entry into a rate-cutting cycle has opened new opportunities for cyclical industries, and traders’ doubts about whether the AI theme can sustain ultra-high valuations have jointly driven fund managers to reduce positions in the long-leading tech giants and seek more diversified allocations.

Data from Deutsche Bank confirms this trend is accelerating. The overall holdings of large-cap growth and technology stocks continue to decline, while exposure to small-cap stocks has climbed to its highest level in nearly a year. In terms of sector fund flows, last week saw nearly $900 million in net outflows from funds dedicated to the technology sector, while other industries attracted $8.3 billion in net inflows, with materials, healthcare, and industrial sectors performing particularly well.

Matt Maley, Chief Market Strategist at Miller Tabak + Co., noted:

"This earnings season is crucial for the other 493 S&P 500 companies outside the ‘Tech Magnificent Seven,’ as well as for small-cap stocks. Market expectations have been raised, and so the bar for performance is set very high."

He added that even though institutional investors, after reducing positions, still remain overweight in tech stocks overall, they are actively searching for the next direction for rotation. Therefore, even if company earnings merely meet expectations, it could still trigger more pronounced capital rotation within the market.

Policy Stimulus Provides Support

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

"The Fed's accommodative policies, declining oil prices, and looser lending standards have all brought potential tailwinds to the relatively weaker lower half of the 'K-shaped' economy."

This combination of policies is seen as a key driving force behind the profit recovery in non-technology sectors. Investors are betting that with these favorable factors combined, the U.S. economy could see accelerated growth in the first half or even the whole of 2026, thereby boosting traditional cyclical sectors to outperform the highly valued technology stocks.

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

Risk Warning and DisclaimerThe market has risks and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. If you invest based on this information, you do so at your own risk.

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