a day ago
Wall Street sees stock market rotation charting 'healthiest path' to new highs
The stock market's rally to record highs has started to suggest some investors see life outside of the Big Tech names that have defined markets since 2023, as lagging sectors like Health Care (XLV) and Homebuilders (XHB) — as well as out-of-favor investments like small- and mid-cap stocks — have played a larger role in this summer's move.
And some strategists see this rotation as an early sign that an even healthier market dynamic could be emerging.
Scott Chronert, managing director of US equity strategy at Citi, sees this broader participation as framing out "two parallel paths" for the S&P 500 — one led by the AI-fueled growth giants and the other driven by more traditional sectors tied to the economy.
"The simple answer is that we see ongoing Mega Cap Growth participation, if not leadership, but with fundamental and performance broadening creating a more durable structural setup," he said on Friday.
"The healthiest path to higher index levels is a combination of Growth/Tech leadership persisting but with other areas of the market additive more so than has been the case this past year."
Data from Bespoke Investment Group published Friday noted investors last week showed signs of moving out of 2025's biggest winners and into less-loved pockets of the market.
Over the middle three trading days last week, Bespoke's work found stocks in the worst-performing decile this year among S&P 1500 companies were up an average of 6.7%; the best performers were up less than 1% over the same period.
"When momentum names stall or sell-off, it can really hit the major indices hard if no other areas of the market are there to pick up the slack," Bespoke said. "But [last] week, the year's worst performers finally saw some buying interest as investors rotated across the market instead of out of it."
Ed Yardeni of Yardeni Research added that rising expectations for a September Fed rate cut helped fuel the shift, sparking a rotation from growth to value and from large caps to small- and mid-cap stocks.
"We certainly welcome such a broadening," he wrote in a Sunday note to clients.
'Significant headwinds' remain
Sean Simonds, US equities strategist at UBS, described the current broadening setup as "a mixed bag," noting that AI-driven momentum is starting to spill into other adjacent areas like software, power, and re-shoring.
Simonds added that after a wave of downward earnings revisions earlier this year, earnings breadth has also shown signs of improving. However, areas such as consumer and healthcare remain weaker, even if the outlook there has turned "less negative."
Gerry Fowler, head of European equity strategy at UBS, added that small-cap stocks in particular depend on a 'Goldilocks' scenario in which the Fed manages to cut rates without spooking markets.
"If Powell is able to stay out of the headlines and deliver the September cut in line with expectations, there is room for the broader market to remain quite healthy," Fowler said. "On either side of Goldilocks, you've got significant headwinds for the Russell 2000."
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
Fowler's cautious note echoes a broader concern on Wall Street, which is that signs of rotation among styles and sectors overstate the extent to which this shift sees investors actually preferring to put more money behind new themes.
DataTrek Research noted in a recent report that just two of the S&P 500's 11 sectors — Technology (XLK) and Industrials (XLI) — have outperformed since the index's April lows. The firm also noted that the top 20 names in the index, or nearly half the S&P 500 on a market cap basis, are up more than 40% on average over that period.
That concentration means the durability of the rally may hinge on whether new pockets of strength can sustain recent momentum.
Looking ahead, Simonds cautioned that momentum could stall if earnings expectations fade or if the Fed delivers a surprise that clashes with market expectations.
"There's still the possibility of earnings expectations slowing into the second half of this year and first half of next year," he said. 'And any disappointment out of Jackson Hole or into the September Fed meeting will definitely take some wind out of the sails as well."
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at
