For stock traders, December is typically a time for “window dressing”—adding to winning positions and shedding underperformers to polish portfolio performance. However, this year’s market behavior has taken the opposite direction. Investors are shifting away from the tech giants that drove the S&P 500’s 17% gain this year, instead aggressively buying high-risk small-cap stocks that have lagged throughout the year, as well as cyclical sectors like transportation, which represents the traditional economy.
Market Performance in Detail
Since U.S. stocks hit a short-term low on November 20, a significant style rotation has emerged. The small-cap benchmark Russell 2000 Index has rallied 9.4% to reach a record high, while the micro-cap index has surged 12%. Sectors closely tied to the economic cycle, such as trucking, shipping, and airlines, have advanced 11%. Over the same period, the S&P 500 gained just 5.1%. This rotation reflects growing skepticism about the “AI-driven broad rally in tech stocks,” with leading names like Nvidia (NVDA) and Microsoft (MSFT) seeing their momentum stall. At the same time, optimistic expectations for an accelerated U.S. economic recovery in the first half of 2026 are driving funds from growth stocks to previously undervalued value stocks.
Several institutional strategists have commented on this rotation. Strategas Asset Management LLC has advised clients to overweight the equal-weight S&P 500 Index. Its co-founder, Jason De Sena Trennert, believes the market expects new administration policies to boost consumption and capital spending, while major sporting events could expand corporate earnings. Bank of America’s Michael Hartnett recommends positioning in cheap mid-cap stocks for 2026, anticipating policy interventions to curb inflation and stabilize employment, alongside a positive outlook for economically sensitive sectors. Oppenheimer Asset Management’s John Stoltzfus also advocates for cyclical sector exposure next year, citing expectations of steady growth and monetary easing, and projects the S&P 500 could climb to around 8,100.
Data Confirms Style Rotation
November’s market performance clearly illustrated the shift in leadership. The equal-weight S&P 500 rose 1.7% for the month, while the traditional market-cap-weighted version gained just 0.3%. Bank of America data shows that the top 50 constituents of the S&P 500 fell 0.6% in November, while the remaining 450 mid- and small-cap constituents rose 1.3%. Against a backdrop of weakness in large-cap tech, healthcare, communication services, and materials led gains. Healthcare was the best-performing sector for the month, up 9.1%, while information technology fell 4.4%, making it the worst performer. Value stocks broadly outperformed growth stocks, signaling a reversal of previously lagging styles.
Sustainability Under Scrutiny
Strategists at JPMorgan note that with Fed rate cut expectations largely priced in and stocks returning to highs, investors may opt to take profits before year-end, potentially stalling recent gains. However, they remain optimistic about the medium-term outlook, citing a dovish Fed, low oil prices, slowing wage growth, and easing tariff pressures as supportive factors. In 2026, reduced trade uncertainty, increased fiscal spending in the eurozone, and the rapid adoption of artificial intelligence could also provide a boost to equities.