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A Cyclical Rotation?

January 21, 2026

Time to Read: 2 minutes

Stronger growth expectations are driving a global rotation out of large cap growth stocks. At a time when geopolitical tensions and tariff discussions continue to simmer, we remind investors to stay invested despite the headline noise.

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The Magnificent Seven and large cap growth stocks outperformed the S&P 500 for the majority of 2025, but equity leadership shifted at the end of October. Cyclical stocks — those that are more economically sensitive — lagged large cap growth stocks and shares of mega cap technology companies until November 1, when we first detected a broadening in markets.

It was the beginning of a global rotation out of those growth-oriented and technology businesses into cyclical areas, such as small caps and large cap value stocks. Since November, cyclicals are up 11.8% compared to the negative returns for growth stocks and big tech in the S&P 500.

What changed? Markets are pricing in a stronger global growth outlook despite current events around geopolitics and tariffs. Many factors support improved economic activity, such as increasing capital expenditures, resilient consumer spending, improving productivity, easing financial conditions and solid earnings growth.

Even given these tailwinds, it is often hard to ignore headline noise. Nonetheless, we reiterate one of our core investing principles: don’t get distracted by headlines and stay invested. Over the long run, wealth is built by staying the course, remaining invested and keeping diversified.

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Returns after Oil Spikes

The Strait of Hormuz, which moves about 20% of global oil, has seen many ships that normally travel through it curtail their activity. Consequently, WTI oil was up over 36% in the five days after the oil supply shock began. Yet equities barely budged, signaling a temporary supply shock, not a larger crisis. Historically, after similar price spikes equities tend to move higher while oil prices decline — further evidence for avoiding emotion-driven investing.

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Impact of Geopolitics over Time?

Tensions between the U.S./Israel and Iran have recently boiled over into a military conflict, which has given many investors the jitters. However, our research shows that equity market pullbacks resulting from geopolitical events are often short lived with the S&P 500 typically higher in the months following these events.

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Behind the Numbers: Q4 GDP

Gross domestic product undershot expectations last quarter, but the shortfall appears driven more by the temporary government shutdown than broad-based weakness. Consumer demand remains resilient, and with supportive fiscal policy, easing financial conditions and a steady labor market, the outlook points to a modest acceleration in economic activity this year.

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Narrow Drawdown?

Equity volatility is rising, but all is not what it seems. The technology sector is weighing on the S&P 500 while value and cyclical stocks lead. A market rotation is underway as many investors begin to favor companies beyond tech.

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