By Sergio.C. | Finance Core Tech
The Rotation Has Already Begun
For three consecutive years, a handful of mega-cap technology companies drove the vast majority of U.S. equity returns. The “Magnificent Seven” — Nvidia, Apple, Microsoft, Alphabet, Amazon, Broadcom, and Meta — accounted for nearly 45% of the S&P 500’s annual returns between 2020 and 2024, according to iShares’ 2026 Investment Directions report.
That concentration is now unwinding — not because tech is collapsing, but because the rest of the market is catching up.
In the second half of 2025, all 11 sectors of the S&P 500 posted annual gains for the first time in years. The top five index weights contributed just 29% of the 11% gain recorded in that period — down sharply from the 45% they had averaged in prior years. The broadening is real, and it is one of the defining equity themes of 2026.
Why Now? The Structural Drivers Behind the Rotation
The rotation is not random. It is being driven by several converging forces.
First, AI is no longer just a software story. Building the infrastructure to run artificial intelligence at scale requires physical things: data centers, power plants, cooling systems, copper wiring, transformers, and land. As Investing.com analysts have noted, more than 160 new AI data centers are currently under construction across the United States, many in regions with constrained electricity grids. This is creating durable, multi-year revenue streams for utilities, grid operators, industrial manufacturers, and energy companies — sectors that investors had long treated as defensive and slow-growing.
Second, earnings growth is broadening. According to FactSet data cited by iShares, non-tech S&P 500 earnings growth accelerated to 12% year-over-year in Q3 2025, up from just 3% in Q2. Ten of eleven sectors beat earnings estimates in Q3 2025, and the median stock delivered its strongest EPS growth in four years. The profit recovery is no longer concentrated.
Third, the Federal Reserve’s easing cycle is helping rate-sensitive sectors. With the Fed holding rates at 3.50%–3.75% as of early 2026 and the market pricing in additional cuts through the year, companies with high debt loads or capital-intensive business models — common in Industrials, Real Estate, and Utilities — benefit from lower financing costs.
Industrials: The Biggest Surprise of the Cycle
If there is a single sector that has most surprised investors in this cycle, it is Industrials.
The sector reported approximately 27% earnings growth in Q4 2025, according to market data compiled by Financial Content. That figure — which rivals the growth rates posted by Information Technology — was driven by two main engines: aerospace and defense spending, and the physical construction of what analysts are calling the “AI grid.”
Companies like Caterpillar and GE Aerospace were standout performers in Q4 2025, benefiting from record construction activity, power infrastructure demand, and global aviation recovery. These are not speculative plays on future technology — they are companies generating real revenue from current demand.
For 2026 as a whole, FactSet’s CY 2026 Earnings Preview projects Industrials as one of the five sectors expected to deliver double-digit earnings growth. The others are Information Technology, Materials, Communication Services, and Consumer Discretionary. Industrials, however, is notable for combining that growth profile with more moderate valuations than its tech counterparts.
Utilities: From Defensive to Growth
Utilities have historically been a defensive, slow-growth sector — purchased for dividend income and stability rather than capital appreciation. That narrative is being rewritten.
The explosion in AI data center construction has created an unprecedented surge in electricity demand. Training large AI models and running inference at scale consumes enormous amounts of power. Oppenheimer Asset Management’s 2026 Market Outlook specifically identifies power demand, electrification, and infrastructure buildout as structural trends offering long-term investment opportunities, noting that clean energy continues to benefit from policy incentives and faster deployment timelines.
The net profit margin for the S&P 500 Utilities sector has improved meaningfully, partly due to AI-related spending, according to Fidelity’s analysis. Grid operators and regulated utilities in high-demand regions are now negotiating long-term power purchase agreements with hyperscalers — contracts that provide revenue visibility for years, not quarters.
This is a genuine structural shift. Utilities are no longer just a bond proxy. In 2026, they are an infrastructure play on the most important technology wave of the decade.
Financials: Quietly Strong
The Financials sector has been one of the quieter beneficiaries of the current environment, but its contribution is meaningful.
With headline inflation (CPI) cooling to approximately 2.4% in January 2026 and the broader economic expansion continuing, banks and financial institutions are operating in a “warm” economy — enough growth to support loan demand without the stress of a recession. The revival in M&A activity has also boosted investment banking revenues. According to Financial Content’s Q4 2025 earnings summary, global M&A volumes hit $5 trillion in 2025, producing a significant tailwind for advisory and capital markets businesses.
Financials have also benefited from the regulatory rollback following the 2024 elections, which has eased capital requirements for some institutions and opened the door to expanded product offerings — including, for some banks, crypto custody and digital asset services.
Small Caps: The Potential Catch-Up Trade
One area that has lagged but is drawing increasing institutional attention is U.S. small caps.
As IncomeShares’ S&P 500 outlook notes, earnings growth for U.S. small caps could reach 20% in 2026 — a dramatic acceleration from recent years — as the Fed reduces rates and debt servicing costs fall for the more levered smaller-company universe. The Russell 2000 has pushed to new highs partly on the anticipation of this earnings recovery.
Small caps tend to be more domestically focused, making them less exposed to currency headwinds and international trade friction. In an environment where tariffs and trade policy create uncertainty for globally exposed multinationals, that domestic orientation can be an advantage.
RBC Wealth Management notes that the S&P 500 Value Index also delivered strong performance in 2025, eclipsing long-term averages — a reminder that the value-oriented, diversified areas of the market have been contributing meaningfully to returns even as media coverage focused almost exclusively on AI-related names.
What to Watch: Risks to the Rotation
The broadening of equity market performance is a healthy development, but it is not without risk.
The most significant near-term threat is a deterioration in the AI capital expenditure cycle. If hyperscalers begin to pull back on data center spending — whether due to investor pressure, slowing AI monetization, or rising energy costs — the industrial and utility sectors that have benefited from this buildout would face headwinds. Morgan Stanley Investment Management has flagged signs of excess in the AI space and warned that the market may be approaching a period of creative destruction.
Trade policy and tariffs remain a wildcard. Industrials and Materials sectors with global supply chains are exposed to escalating trade friction. The political dynamics of a midterm election year add uncertainty on this front.
And valuations, while more reasonable outside of tech, are not cheap by historical standards. The S&P 500 trades at approximately 22.4x forward earnings — requiring earnings delivery to justify current prices without multiple expansion.
Bottom Line
The defining equity story of 2026 is not whether AI continues to grow — it almost certainly will — but whether the market’s gains can be sustained beyond the narrow cluster of mega-cap technology companies that drove three years of outsized returns. The evidence so far suggests the answer is yes.
Industrials, Utilities, Financials, and small caps are all contributing in ways they have not for years. Earnings growth is broadening, valuations outside tech are more attractive, and structural tailwinds — from the physical infrastructure of AI to the rate-easing cycle — are supporting sectors that were long overlooked.
For equity investors, 2026 is a year to think beyond the index weights and consider where the next leg of growth may actually come from.
This article is for informational and educational purposes only and does not constitute financial or investment advice. Always consult a qualified financial professional before making investment decisions.