As the latest U.S. earnings season kicks off, investors’ preference for companies benefiting from an accelerating economy faces a significant test. Capital that flooded into tech giants over the past three years has begun shifting toward value stocks such as banks, consumer goods manufacturers, and materials producers, betting that these sectors will outperform against the backdrop of an accelerating U.S. economy by 2026. However, large technology companies are still expected to be the primary contributors to the S&P 500’s fourth-quarter profit growth. According to Bank of America, earnings in the technology sector are projected to grow 20% year-over-year, while earnings expansion for non-tech companies could slow from 9% to 1%.
Investors are hoping that the corporate sector will reaffirm Wall Street’s prevailing forecast—an explosive growth for the U.S. economy in the first half or even the full year. Michael Kantrowitz, Chief Investment Strategist at Piper Sandler & Co., pointed out that earnings guidance will be a critical signal and emphasized transportation, housing-related industries, and manufacturing as his most favored areas. Recent market performance has already reflected optimism about the economic outlook: since early November, small-cap and value stocks have gained favor. The Russell 2000 small-cap index has outperformed the S&P 500 for seven consecutive trading days, marking its longest winning streak in seven years. The last time the index achieved a longer run of outperformance was in January 2019, when the U.S. stock market was recovering from a steep decline that nearly fell into a bear market.
Despite the strong performance of small-cap and value stocks, their earnings growth prospects still face challenges. An analyst team led by Wendy Soong predicts that the profit growth rate for S&P 500 value stocks is only 9%, less than one-third of the growth rate for growth stocks. As the core sector of growth stocks, technology stocks are expected to achieve a profit growth rate of up to 30%. However, other sectors also show bright spots: industrial companies in the S&P 500 are projected to drive profit growth of 13%, while non-essential consumer goods and services companies are expected to grow by 12%. Profit growth rates for healthcare, materials, and essential consumer goods companies are also close to 10%. Kantrowitz believes that factors such as the Federal Reserve’s accommodative monetary policy, falling oil prices, relaxed lending standards, and the “Big and Beautiful Act” may benefit the economy and undervalued segments of the stock market.
After years of market dominance by a few AI giants, robust earnings forecasts are crucial to support the rotation of capital beyond tech stocks. The Federal Reserve’s accommodative policies have revitalized economically sensitive sectors, while traders’ doubts about the sustainability of AI-driven trades are prompting fund managers to diversify away from long-term winners. Data from Deutsche Bank shows that allocations to large-cap growth and tech stocks continue to decline, while allocations to small-cap stocks have risen to nearly a one-year high. Recent capital flows confirm this trend: sector-specific funds in technology saw nearly $900 million in outflows last week, while sectors such as materials, healthcare, and industries attracted $8.3 billion in inflows.
