TheS&P 500 has been churning between 6700 and 7000 since November, however underneath the floor, there’s been a serious shift in winners and losers.
It’s now not big-cap expertise that’s delivering mouth-watering good points. As an alternative, it’s baskets like power, client staples, and healthcare which might be profitable – a worrisome development given these sectors are likely to carry out finest within the late levels of the financial cycle.
These teams, plus utilities (XLU), which simply shot up Limelight Alpha’s sector rating, are racking up huge good points – a seismic shift that has led to index ETFs that extra carefully monitor them, together with the Russell 2000 and equal-weight S&P 500 (RSP), to outperform.
The magnificent seven is much from magnificent this 12 months, with the common member slipping 7% year-to-date, and the Roundhill Magnificent Seven ETF tumbling 12% from its peak final fall and flirting with a lack of technical assist at its carefully watched 200-day transferring common.
The shift in efficiency has sparked debate over whether or not the expertise slide is a pause that refreshes or a harbinger of extra losses.
A sector rotation in 2026 has shifted traders’ focus towards defensive sectors from expertise.
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Sector mannequin pivot sends cautionary message on what’s subsequent
Limelight Alpha’s multi-factor sector mannequin crunches information weekly to rank baskets roughly more likely to reward traders. The rating, based mostly on my analysis from the early 2000s once I was engaged on Wall Avenue’s promote aspect, has confirmed power shares’ dominance since final fall, when rattling sabers raised the potential of unlocking Venezuela’s huge oil reserves.
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The rating has additionally pivoted to mirror ongoing curiosity in diversifying away from expertise, which has scored beneath common for weeks, towards beforehand under-loved teams, together with healthcare, fundamental supplies, and staples.
Now, Limelight Alpha’s newest weekly information has added one other defensive twist: utilities, a favourite basket amongst defensive-minded traders, has surged into the second spot within the large-cap rating, trailing solely power.
Massive Cap
Common Rating
ENERGY
82.83
UTILITIES
81.67
BASIC MATERIALS
74
CONSUMER GOODS
72.68
INDUSTRIALS
72.16
HEALTHCARE
69.64
FINANCIALS
66.19
REITS
62.2
SERVICES
61.35
TECHNOLOGY
59.23
Supply: Limelight Alpha
The pivot isn’t a name to vary long-term funding plans. Nevertheless, it’s a sign that ought to remind traders that shares don’t go up (or down) in a straight line. As an alternative, they zig and zag, with many pops and drops alongside the way in which, creating danger and alternatives for traders.
What’s driving the shift from expertise to defensive sectors
It’s actually attainable that the weak spot in expertise shares is just a velocity bump alongside the way in which to better good points down the street.
There’s a very good argument that February’s market churn is to be anticipated, given seasonality suggests February is historically a weak hyperlink, together with throughout mid-term election years. I wrote extra about February being a ‘banana peel’ month right here.
It’s not misplaced on me that we additionally noticed related doubts hit expertise shares final 12 months, when questions emerged about huge AI spending plans derailing company earnings. Most shares recovered strongly via final fall, earlier than struggling.
As an alternative of a wholesale S&P 500 promote sign, sector rotation might merely mirror a transition to a extra discriminating investor as AI curiosity shifts from “anything at any price” to a deal with who the actual winners and losers are.
That will surely appear to be true based mostly on the efficiency of software program shares, which have tumbled this 12 months amid concern that agentic AI would dismantle software-as-a-service as we all know it, crimping gross sales and revenue progress, and forcing a rerating after years of a higher-than-market valuation pushed by the business’s sky-high margins.
With expertise, arguably priced to perfection, together with software program shares, accounting for over one-third of the S&P 500, it’s not out of bounds to anticipate a mindset shift to “prove it” that will result in erasing some inventory market froth.
After which, when you think about corporations extra more likely to profit from such a shift, defensive teams like power, healthcare, client staples (and sure, utilities) do match the invoice:
- These corporations are historically weighed down by hefty, mounted prices that AI might conceivably cut back, boosting margins and earnings whereas expertise margins get squeezed by quickly rising spending plans.
- Utilities shares are more likely to profit from rising power demand from all these power-hungry server farms coming on-line and decrease rates of interest’ affect on curiosity expense.
- Healthcare, utilities, and staples shares are likely to carry out finest within the late stage of the financial cycle, when GDP progress is peaking, and the chance of deceleration emerges, growing risk-off urge for food.
What can traders do now?
The S&P 500 has efficiently held round 6750 to 6800 since November. If that adjustments, then we may see a extra substantial retreat towards the 200-day transferring common, which rests at the moment close to 6500.
Lengthy-term traders have traditionally been rewarded for dollar-cost averaging into market weak spot, however short-term traders might need to rethink their publicity, particularly in the event that they’re utilizing leverage like margin, which may worsen losses.
If that is merely a February swoon, the market ought to begin to head increased quickly. The Inventory Dealer’s Almanac reviewed all mid-term election years since 1949, and typical February weak spot tends to finish by early March, with the S&P 500 trending up via mid-April earlier than sliding once more via summer season forward of the election.
If it is a sign of one thing worse, traders will need to hold a detailed eye on how the S&P 500 behaves if it fails to eclipse 7,000, falls, and retreats to the 200-dma.
In any case, constructing small starter positions in these defensive sectors, together with utilities, might assist you to diversify some danger if you happen to’re overly uncovered to tech shares.
Total, if you happen to zoom out, there may be some excellent news: Whereas 2026 seems to be unstable, mid-term weak spot has traditionally offered an intriguing shopping for alternative.
“Where there is great danger, there is also great opportunity,” wrote Inventory Dealer’s Almanac’s Jeffrey Hirsch. “After reaching negative territory in Q2 and Q3 stocks should rally in Q4.”
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