The S&P 500 is a story of two tapes since September as buyers have locked in years of eye-popping beneficial properties in big-cap tech and rotated into under-owned baskets like vitality. The broadening past know-how is a vital shift that is buoyed by a authorities and Federal Reserve bent on accelerating financial progress.
Morgan Stanley’s Chief US Fairness Strategist, Mike Wilson, thinks a “run it hot” economic system is prone to proceed supporting fairness costs via 2026, and that lately out-of-favor know-how shares are merely experiencing a pause that refreshes.
“Fundamental tailwinds remain in place for the AI enabler complex, and the AI adopter trade remains underappreciated, in our view,” wrote Wilson in a analysis notice shared with TheStreet.
The inventory market scorecard:
- The U.S. financial gasoline pedal is down:GDP is predicted to develop 2.6% in 2026, in line with Goldman Sachs. Longtime Wall Road fund supervisor Louis Navellier sees a path to five% GDP progress this yr.
- Extra corporations rallying is optimistic: Increasing past big-cap tech displays widespread tailwinds throughout many sectors. Optimistic breadth is traditionally an excellent signal for the inventory market, in line with Carson Group Strategist Ryan Detrick.
- Earnings are rising: FactSet studies fourth-quarter S&P 500 earnings progress of 13%, with 59% of corporations reporting outcomes to this point. That places us on tempo for a fifth consecutive quarter of double-digit earnings progress for the benchmark.
- Massive-cap tech nonetheless has tailwinds and is cheaper: Wilson says mega-cap know-how income progress expectations of 18% are a multi-decade excessive, but ahead P/E ratios have dropped to 27, simply the twelfth percentile since early 2003.
Shares hit the reset button in 2026
Decrease rates of interest are notably excellent news for small-cap shares, which profit most from simpler credit score and decrease curiosity expense, in addition to top-line demand tailwinds from GDP progress.
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Unsurprisingly, the removing of Chairman Jerome Powell, who took hearth for holding the Fed Funds Charge impartial for many of 2025, and the nomination of Kevin Warsh, who could also be extra dovish on financial coverage, have helped drive a strong rally in small-cap shares this yr.
Quick truth: The iShares Russell 2000 ETF (IWM) manages $77.3 billion, whereas Vanguard’s Russell 2000 ETF (VTWO) manages $14.3 billion.
The iShares Russell 2000 ETF is up 17% from its November low, together with an 8.8% return in 2026 that’s considerably higher than the tech-heavy S&P 500’s 1.9% return.
Morgan Stanley’s Wilson expects that pattern to proceed:
“The S&P Small Cap Index is seeing its best [earnings] revisions breadth since August (+7%) and its strongest EPS growth since 2022 (+10%). Further, it just made a new relative high versus large caps last week. These developments are supportive of our small-cap relative preference amid a return of positive operating leverage.”
Extra Wall Road:
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The IWM is way much less weighted towards know-how shares and way more towards beforehand less-loved sectors like industrials and healthcare than the S&P 500. As an illustration, info know-how accounts for 10.6% of the Russell 2000 however 33.4% of the S&P 500 ETF (SPY).
Russell 2000 ETF sector weightings (2/9/2026)
- Industrials: 19.2%
- Financials: 17.4%
- Healthcare: 17%
- Expertise: 14.1%
- Client Discretionary: 8.8%
Supply: BlackRock, iShares Russell 2000 ETF
Morgan Stanley analyst says AI rally is not over
Wilson is a fan of small-cap shares, however he additionally thinks that big-cap know-how, and particularly AI shares, may nonetheless march greater in 2026.
One of many main catalysts that might trigger Magnificent Seven shares to rally once more is that ahead income progress estimates on Wall Road recommend 18% top-line progress that may assist earnings upside, says Wilson.
Associated: Financial institution of America sends quiet warning to inventory market buyers
“The Information Technology sector is reporting the highest (year-over-year) revenue growth rate of all eleven sectors at 20.4%,” in line with FactSet’s S&P 500 information.
FactSet studies that the typical Wall Road analyst expects S&P 500 info know-how shares to report 37.7% year-over-year earnings progress within the first quarter and 30.4% year-over-year progress in 2026, largely pushed by big-cap know-how shares.
Wilson additionally thinks big-cap know-how shares’ outcomes this yr will profit from ongoing weak spot within the U.S. Greenback, on condition that these corporations have substantial abroad income streams.
“The US Dollar Index is down 9% Y/Y, a relative tailwind for mega cap Tech given high foreign sales exposure,” mentioned Wilson. “The Nasdaq 100, for instance, has ~50% foreign revenue exposure.”
Todd Campbell owns shares within the iShares Russell 2000 ETF (IWM).
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