The Times They Are a-Changin’

Those more familiar with the rhythms of the stock market know about sector rotation. It is simply the shift in the focus and interest of investors from one sector to another, seeking enhanced performance or mitigated downside volatility.

Over the past several years there has been little rotation as index returns have been dominated by a few mega cap technology companies, otherwise known as the “Magnificent 7”. There has been concern that a market narrowly dependent on a handful of stocks cannot last for long. To have what most professionals see as a healthy market, the rest of the market sectors must participate along with the leaders; otherwise, it raises the risk of that leading sector losing favor, thus creating a downdraft in the market.

Early 2026 is showing a notable shift in dynamics. The intense concentration on the Magnificent 7 is giving way to a broader market leadership, with capital rotating into traditional “value” and cyclical sectors, as well as those set to benefit from the second wave of AI implementation.

While AI remains a strong underlying theme, the high valuations in the tech sector appear to be causing investors to seek attractive, short-term opportunities elsewhere. The market is exhibiting early signs of a genuine sector rotation, favoring areas that were laggards in 2025 but possess strong earnings growth potential in the current economic environment of easing monetary policy and persistent demand for data center infrastructure. We view a stock market that is less reliant on a handful of companies as a healthy market going forward. Within our portfolio, we would expect to see the performance of the ‘non-tech’ portion of portfolios to benefit from this trend.

Today’s Market Rotation Activity

The current market rotation is visualized in the graph below, known as a Relative Rotation Graph (RRG). RRGs illustrate the relative strength and momentum of various sectors against a common benchmark—in this case, the S&P 500 Index.

The chart is divided into four quadrants, and sectors typically rotate in a clockwise direction through these stages:

    • Leading (Green): Outperforming the S&P 500 with strong momentum.
    • Weakening (Yellow): Still outperforming but losing steam.
    • Lagging (Red): Underperforming the S&P 500.
    • Improving (Blue): Underperforming but building momentum toward the green “Leading” zone.

The tails show the path a security has taken over a set period. Each dot is a weekly reading with the large dot being the most current. Longer tails indicate greater volatility or more significant price moves. The center point, where both axes meet at 100, represents the S&P 500 Index.

For those who might want a little more detail, the X-Axis is the Relative Strength Ratio (RS). Values above 100 indicate relative strength as compared to the S&P 500, while values below 100 show relative weakness. The Y-Axis is the momentum of RS, measuring the rate of change of the RS-Ratio. It is a leading indicator that often turns before the trend itself.

 

This chart shows that most S&P 500 sector ETFs are in the blue area. Relative strength is weak but improving and all are trending toward the green zone, which is the outperformance quadrant. XLY (Consumer Discretionary) has just barely moved from the lagging red zone into the blue and XLC (Communications) is not far behind. We note that the dominant companies in those two sectors are Google, Meta, Amazon, and Tesla.

XLK, the Technology ETF which includes Nvidia, Microsoft, Apple and Broadcom, is weakening badly, and is headed for the lagging quadrant. The recent outperformer has been Healthcare (XLV), but even in that case, the momentum is shrinking.

The sectors that look most promising right now are:

    • XLF – Financials
    • XLB – Materials
    • XLI – Industrials
    • XLE – Energy
    • XLP – Consumer Staples

The financial sector appears poised for a strong year, benefiting from expected Fed rate cuts and a steepening yield curve, which create a supportive earnings backdrop. One concern is having investors surprised by fewer Fed rate cuts, or cuts for reasons investors would not prefer: economic distress.

Materials and Industrials are beneficiaries of the broader infrastructure needs of a massive AI infrastructure build-out.

Energy and Staples are sectors that have been largely forgotten over the last couple of years, but are now cheap enough to make a splash, particularly energy, post the elimination of Maduro in Venezuela.

As to our technology exposure, we remain cautious in the short term, while keeping a firm view of the long-term opportunities the sector can offer investors. We share this view with our Emerging Growth Portfolio advisors that any weakness in the broader technology sector in this rotation may create attractive buying opportunities.  As is always the case, we are glad to discuss any questions with you as they arise.

Have a great week!

 

What We’re Reading

  

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be dependable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be dependable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that no such statements are guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

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General News

By: Adam