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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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Are Earnings Broadening Beyond the Mag-7?

Tech stocks have outperformed the rest of the S&P 500 for several years, and while we expect earnings growth among these companies to continue in 2026, we see another encouraging trend emerging. Earnings across the rest of the market are on an upward path too — and are set to contribute more to earnings growth for the S&P 500 Index in 2026 than the Magnificent 7.

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Positive Signals from Industrial Production?

Industrial production is a proxy for the level of manufacturing in the economy, and last week’s report showed the highest growth rate in three years.

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Healthy Correction?

After climbing 17% year to date through late October, the S&P 500 declined 5% through November 20. We believe the market was due for a healthy correction. While further downside is possible, it would not concern us.

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