The U.S. stock market has pushed higher this year despite angst over the Federal Reserve's independence and heightened tensions around U.S. foreign policy.
Investors are moving away from Big Tech, in an epic rotation that has left a popular exchange-traded fund that focuses on such stocks on track for its longest monthly losing streak since 2023. While Big Tech stocks have weighed on the S&P 500 index SPX this year, investors are rotating their money into other pockets of the market. That's strengthening the market's breadth, or the different kinds of stocks participating in the rally, and helping lift it to record peaks in 2026.
Cyclical sectors such as materials XX:SP500.15 and industrials XX:SP500.20, which tend to benefit from optimism about the U.S. economy, have done well. Yet this past week, a traditionally defensive area of the market stood out with strong performance, even as investors continued to anticipate economic growth.
"Rotation is almost a trading style right now," said Liz Ann Sonders, chief investment strategist at Charles Schwab, in a phone interview - noting that rotation itself has become "the momentum trade."
Traders are helping to fuel the bull market in U.S. equities this year as they look beyond Big Tech for investment opportunities, with investors expecting earnings growth beyond the megacap stocks known as the "Magnificent Seven." Small-cap stocks have surged past the S&P 500, while the U.S. large-cap index's consumer-staples sector outperformed this past week, as investors bought shares of such companies after the sector lagged far behind in the current bull market.
Consumer staples XX:SP500.30, a traditionally defensive area of the stock market, rallied 3.7% this past week to finish Friday with the second-biggest weekly gain among S&P 500 sectors, behind real estate XX:SP500.60, according to FactSet data. That increased the big rise in consumer staples this year to 5.7%. By contrast, the S&P 500's largest sector, information technology XX:SP500.45, finished Friday with a weekly loss of around 0.7%, to leave it with a decline this year of 0.6%, FactSet data show.
Investors have scooped up shares in consumer staples after the sector sorely lagged the S&P 500 over the past three years, according to Keith Lerner, chief investment officer and chief market strategist at Truist Advisory Services.
Consumer staples trailed the S&P 500 by a whopping 67 percentage points over the three years through 2025, while the S&P 500 surged 78% over that same period, FactSet data show.
"There's a rotation into things that have been left behind," said Lerner. In a new year, investors tend to take "a fresh look" to see which areas of the market are "beat up" and might look good on a relative basis, he added.
A 'Magnificent' losing streak
Meanwhile, the artificial-intelligence investment theme appears to be spreading beyond Big Tech stocks, where AI enthusiasm initially drove such large gains. The S&P 500 is heavily exposed to the likes of Apple (AAPL), Microsoft (MSFT), Google parent Alphabet (GOOGL) (GOOG), Nvidia (NVDA), Amazon.com (AMZN), Tesla (TSLA) and Facebook parent Meta Platforms (META) - a closely watched group of tech stocks known as the Magnificent Seven.
The Roundhill Magnificent Seven ETF, which seeks to equally weight Big Tech stocks in that group, has dropped 1.6% in January. That put the ETF on pace for a third straight month of losses, which would be the first time that it saw such a losing streak since 2023, according to FactSet data.
Apple and Meta have each seen their shares drop 6% so far in January, while Microsoft has slumped nearly 5% this month through Friday. Apple's stock ended Friday on pace for its biggest monthly drop since March, FactSet data show.
Still, the S&P 500 has gained 1.4% in 2026 through Friday, as investors seek opportunities elsewhere in the U.S. stock market to keep the bull run going after strong gains in each of the past three years. Major U.S. stock benchmarks, including the Dow Jones Industrial Average DJIA and Nasdaq Composite COMP, are also up in 2026 despite heightened geopolitical tensions in Venezuela and Iran, as well as worries over the Federal Reserve's independence after the Justice Department launched a criminal probe into Fed Chair Jerome Powell.
Read: Trump tried to give Powell one last shove out the door. Now he's likely to stay at the Fed.
In a healthy sign of the U.S. stock market's broadening rally, the Invesco Equal Weight S&P 500 ETF RSP, which equally weights stocks in the index, has outperformed with a 3.9% jump so far in 2026.
Hardware excitement
Excitement around the AI trade extends beyond Big Tech, said David Wagner, head of equities and a portfolio manager at Aptus Capital Advisors, in a phone interview. He pointed to Lam Research (LRCX) and KLA (KLAC) as examples of companies in the semiconductor industry that are benefitting from broadening enthusiasm around artificial intelligence. Shares of both those companies have surged around 30% this year and are held by the iShares Semiconductor ETF SOXX, whose shares have soared 13.7% in 2026 through Friday, FactSet data show.
"The AI trade has become focused on the hardware side," said Louis Navellier, chief investment officer at Navellier & Associates, in emailed commentary Friday. "There are growing concerns that the software part of the AI growth will be coming in [2027 and 2028] after the data centers are built out."
Elsewhere in the broadening role of AI, Walmart (WMT), the retail giant that belongs to the S&P 500's consumer-staples sector, announced on Jan. 11 that it was planning new shopping experience using AI via Google's Gemini. Walmart's stock rallied after the announcement, ending Friday up more than 7% this year, according to FactSet data.
The evolving AI boom now has analysts asking questions around how companies in various sectors are bringing the new technology "into play," said Charles Schwab's Sonders. She also pointed to small-cap stocks in the U.S. this year as reflecting investor appetite beyond the megacap stocks that dominate the S&P 500 and receive outsize attention due to their AI links.
Small caps are 'unbelievable'
The Russell 2000 RUT, an index of small-cap equities in the U.S., initially got a lift from expectations for a shift toward easier monetary policy by the Federal Reserve, Sonders noted, as lower interest rates would take some pressure off their balance sheets.
But lately, optimism on the earnings-growth trajectory for the Russell 2000, relative to the large-cap S&P 500, has helped fuel its outperformance, she said.
The Russell 2000 has surged 7.9% this year through Friday, trouncing the S&P 500's 1.4% gain, according to FactSet data.
"It's unbelievable," Wagner said of the rally in small-cap stocks. "It's been pretty heavy consensus that the market is broadening out," he added, creating some "excitement" for investors this year as they rotate into stocks beyond the Magnificent Seven.
-Christine Idzelis