While top Wall Street analysts are loudly proclaiming that 2026 will be a "rotation bull market," some institutional investors argue that this rotation panic is absolutely not sustainable. They suggest that investors should continue betting on the high-weightage U.S. "Magnificent Seven" tech giants to significantly outperform other sectors in 2026, powerfully leading the S&P 500 and Nasdaq 100 indices to repeated new highs. The S&P 500 is expected to close 2025 strongly at a record high, which is set to pave the way for continuing to set new records in 2026.
Judging from the sector performance of the U.S. stock market, market leadership has indeed rotated from "technology and growth stocks closely related to AI" to other long-underestimated investment sectors such as value, healthcare, and materials. In terms of percentage contribution to gains, the S&P 500's rally since the "AI bubble theory" swept the market in November has not been entirely concentrated, as seen in the past two years, on the seven tech giants that hold a high 35% weighting and are closely tied to AI. Instead, it has spread from the AI investment theme to various sub-sectors, with Wall Street analysts predicting that this "rotation bull market" will be the main theme for 2026.
Despite the increasingly apparent market rotation, in the view of institutional investor JR Research, who successfully predicted in late 2022 that NVIDIA's market cap would surpass Apple's, this rotation will not last long. "The AI investment theme surrounding AI computing infrastructure build-out and the Mag 7 will remain the stock market's strongest main theme throughout 2026, just as in 2024 and 2025," the investor stated in a report. JR Research emphasized that the AI computing infrastructure and Mag 7 themes remain core, with the "picks and shovels" companies in the tech sector still driving the market's long-term value expansion.
If Trump nominates an extremely dovish individual as Fed Chair, coupled with the Magnificent Seven's still exceptionally strong earnings and an earnings growth rate in 2026 that is expected to outpace the aggregate earnings growth of the remaining 493 S&P 500 companies, as it did in the previous two years, they are poised to continue providing the core fuel for the S&P 500's robust overall earnings growth in 2026 and lead the entire market higher. In this scenario, investors should indeed maintain exposure to them, and in JR Research's view, even further increase their bets on the AI tech theme that has supported this astonishing multi-year bull market since the 2022 bear market bottom.
The S&P 500's cumulative gain of approximately $30 trillion over the past three years in this "super bull market" has been largely driven by the world's largest tech giants (such as the U.S. Magnificent Seven). It has also benefited from companies enabling massive investment in AI computing infrastructure (such as Micron, TSMC, and Broadcom) and power system suppliers (like Constellation Energy).
The so-called "Magnificent Seven" (Mag 7), which hold a high weighting (approximately 35%) in the S&P 500 and Nasdaq 100 indices, include: Apple, Microsoft, Alphabet, Tesla, NVIDIA, Amazon, and Meta Platforms, the parent company of Facebook. They are the core driving force behind the S&P 500's repeated new highs and are regarded by top Wall Street investment firms as the portfolio most capable of delivering substantial returns to investors amidst the largest technological transformation since the internet era.
The Santa Claus rally has arrived as expected, but how will the market perform in 2026? With only the final week of 2025 left for reflection, many investors view 2025 as another very successful year—the U.S. stock market benchmark S&P 500 is up nearly 19% year-to-date. The Santa rally received solid reinforcement: the S&P 500 closed at a record high before Christmas, creating a perfect timing for Santa's arrival, which is expected to drive the last wave of gains for the year and open 2026 with strong, optimistic momentum.
Looking back, the year began perhaps full of anticipation, then quickly flipped to unease (marked by April's "Liberation Day"), followed by what we experienced as the "most unloved V-shaped rebound" in recent years, with the S&P 500 maintaining its upward path almost without looking back since. Since April, downward volatility has occasionally tried to overwhelm buying interest, but bears have consistently lacked the conviction and stamina to follow through on their thesis. This is because the "AI bull market narrative," driven by the AI investment frenzy and expanding risk appetite, continues to exist with surprising intensity, catalyzed by the vigorous progress in AI data center construction and exceptionally strong AI capital expenditure.
Looking ahead to 2026, as the rotation theme gains more recognition among Wall Street analysts, market trading logic is shifting across several notable dimensions. The AI investment theme has recently stumbled, with few exceptions among tech leaders, such as U.S. memory chip leader Micron (MU.US), whose stock hit repeated new highs after its latest earnings report. While AI chip leaders like NVIDIA (NVDA.US), AMD (AMD.US), and Broadcom (AVGO.US) remain significantly below their 2025 peaks, the market is clearly accelerating capital reallocation, shifting the narrative from growth to value, from tech to non-tech; these undercurrents are beginning to accelerate during the year-end "window dressing" for 2026.
Furthermore, the stock performance of U.S. software companies this year has been less than ideal, which is undoubtedly a significant negative signal for the "AI bull market logic." After all, genuine AI revenue generation and monetization pathways will largely depend on these SaaS-type software companies. With the major exception of Palantir (PLTR.US), the stock trends of software peers like Salesforce (CRM.US), Adobe (ADBE.US), and even ServiceNow (NOW.US) are burdened with heavy pessimism and bearish sentiment, with cautious buyers staying on the sidelines, reluctant to add positions. The market is eager to reinforce its bullish thesis on AI infrastructure plays, but this has not been consistently applied across the SaaS value chain.
In 2026, as the market weighs the prospects of beaten-down software companies that still demonstrate robust operational performance, solid long-term margins, and early-stage monetization opportunities for both AI and non-AI workloads, might we finally see a much-needed resurgence in software stocks—whether through a fundamental turnaround or a rotation into these neglected names?
Although AI has been central to driving market momentum and sentiment since the 2022 bear market bottom, we must be cautious not to too quickly conclude that these SaaS companies will be disrupted by the adoption speed presented by large language model (LLM) companies. Their economics are clearly unproven (still unprofitable and burning cash on AI compute infrastructure, despite improved gross margins), and the "Agentic AI" revolution might be overhyped at this stage. These "stumbles"反而 provide a buy-on-the-dip opportunity for the SaaS value chain: allowing the pace to slow, regrouping, and making necessary adjustments to transform their corporate AI monetization strategies and secure the momentum needed to maintain their important place in this unprecedented AI industrial revolution, which is likely far from entering a late-cycle phase.
Nevertheless, it is still good to see the S&P 500 undergoing a healthy rotation from tech and growth leaders to previously less favored sectors. Defensive cyclical sectors like Healthcare and Materials have staged strong rebounds, beginning to provide important support for the S&P 500's upward move since November. Additionally, risk-on cyclical sectors like Consumer Discretionary, Financials, and Industrials have also been rebounding recently, helping the U.S. stock market maintain its climb amid current "AI bubble" concerns overshadowing tech and growth peers.
However, in JR Research's view, even though market leadership appears to have begun shifting away from tech, the tech-heavy S&P 500 and Nasdaq 100 indices are unlikely to decouple from the core AI theme trade. "Although we can still find secondary or 'second derivative' investment opportunities supporting AI infrastructure build-out in areas like Utilities, Real Estate, and even Energy infrastructure, I believe the main line of the 'AI bull market narrative' will remain firmly rooted in the 'picks and shovels' companies within the tech sector. As shown, the bulk of actual value flows to those large tech companies involved in executing AI data center development and deployment, such as NVIDIA, Broadcom, Alphabet, as well as AMD, Micron, etc." Therefore, JR Research states, "I find it hard to envision a new leader emerging in this value capture—we are still in the early stages of a trillion-dollar AI investment race," meaning the market is still pricing in who truly holds the AI crown.
Overall earnings estimates for the S&P 500 have been consistently revised upwards, extending into 2026. While intermittent concerns about valuation multiple compression have emerged, the market seemed largely unperturbed in the second half of the year. Some analysts still do not anticipate significant risks of a major downturn, as the Fed is expected to be dovish, especially with weak consumer sentiment persisting through December and potentially fragile labor market conditions next year. Given that the current top candidates for Fed Chair are heavily dovish, the market is unlikely to rush for the exits due to fears of Fed policy uncertainty.
Simultaneously, the possibility of a "melt-up" phase cannot be ruled out; it could also trigger a pattern leading to a larger market peak—or what some call the ultimate bull market top—echoing the most feared narrative of an AI bubble burst. In such a scenario, a dovish Fed might prompt further easing of monetary conditions, thereby attracting investors still on the sidelines back into the stock market, especially if the ROI from fixed-income investments potentially declines.
Furthermore, the strong earnings demonstrated by the Magnificent Seven are expected to provide the crucial "ballast" needed for the market to sustain above-average valuation multiples. Wall Street analyst expectations compiled by FactSet (on a calendar year basis) indicate that the "Magnificent Seven" are projected to see earnings surge approximately 22.7% in 2026; meanwhile, the aggregate earnings of the remaining 493 S&P 500 component companies are expected to grow about 12.5%. A FactSet research report notes that the Seven generally possess stronger pricing power, economies of scale, and high free cash flow, coupled with support for EPS from capital actions like buybacks, making their earnings growth more likely to outpace the market average.
Current Wall Street projections show forward operating EPS for 2026 at approximately $312.4, rising to about $358 for 2027. EPS expectations were consistently revised upwards during 2025, primarily because analysts underestimated the underlying intensity of data center construction behind the AI investment boom, while also actively assessing the higher-than-expected risks posed by Trump's tariffs and trade uncertainty.
Right at the beginning of 2025—before the globally popular, ultra-low-cost AI training chatbot DeepSeek, launched by a Chinese AI startup, ignited market concerns about the valuations of AI-benefiting tech stocks and amplified fears of competition from Chinese rivals—legendary investor Howard Marks warned that he was in "bubble-watching" mode. This view is notable because the co-founder of Oaktree Capital Management was among those investors who accurately predicted the timing of the 2000 internet bubble burst. However, this is clearly not the consensus view on Wall Street.
A recent report from strategists at BofA Global Research indicated they "do not see an AI bubble of any sort." According to data compiled by another Wall Street giant, Jefferies, Wall Street analysts generally expect overall profit growth for S&P 500 component companies to accelerate year-over-year, potentially continuing through 2027. A recent BofA research report stated that the global AI arms race is still in its "early to middle stages"; Vanguard, one of the world's largest asset managers, recently noted in a research report that the AI investment cycle might only be 30%-40% complete towards its ultimate peak. However, the asset manager stated that the risk of a correction in large-cap tech stocks is indeed increasing.
Although tech giants' valuations are elevated, they are not at "extreme" bubble-burst levels compared to past periods of market euphoria. The market often compares it to the 2000s internet bubble, but the scale of AI-driven gains is not equivalent to the internet development period. For instance, BI statistics show the tech-heavy Nasdaq 100 index trades at about 26 times expected earnings; at the peak of the internet bubble, this multiple exceeded a staggering 80. Valuations during the internet bubble era were much higher than now, both because price gains were more exaggerated and because the tech companies then were "younger," less profitable, or had no profits at all.
Tony DeSpirito, BlackRock's Global Chief Investment Officer and portfolio manager for fundamental equities, believes current valuations are not "internet bubble-like multiples." However, the veteran asset manager stated this doesn't mean there is no sporadic speculation or localized irrational exuberance, but he does not believe this exuberance is concentrated in AI-related "Magnificent Seven" names.
In its annual outlook, J.P. Morgan stated that the market trading landscape in 2026 will not differ greatly from 2025, with market-leading stocks exhibiting extreme crowding and record concentration in AI giants (i.e., the U.S. Magnificent Seven continuing to hold high weightings). J.P. Morgan views the current AI-driven super investment cycle as the core of its optimistic outlook. This cycle has driven record capital expenditure, rapid earnings expansion, and created an "unprecedented" market concentration in AI beneficiaries and high-quality growth companies. The report defines these quality companies as those with strong profit margins, robust cash flow growth, disciplined capital returns, and low credit risk, emphasizing that this technology-driven structural shift is reshaping the market landscape.
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