Yesterday felt different.
I was watching the tape in the afternoon when Visa suddenly ripped 6% higher on absolutely no news. Then Nike, UnitedHealth, even old-school industrials started flying. Meanwhile, across the room, someone muttered that Nvidia was down again. That’s when it hit me: the market was actually rotating, and it wasn’t subtle anymore.
By the close, the Dow Jones Industrial Average had surged 646 points – a solid 1.3% – and closed at a brand-new all-time high. The S&P 500 joined the party with its own record close. The Nasdaq? Down on the day. That hasn’t happened often in 2025.
The Rotation Trade Everyone Stopped Believing In Just Showed Up
For almost two years we’ve heard the same refrain: “Wait until the rally broadens out.” “Wait until the other 493 stocks catch up.” “Wait until value beats growth again.” Most of us rolled our eyes so hard we saw stars.
Well, guess what showed up right after the Fed’s third rate cut of the year?
The rotation trade – in neon lights.
What Actually Happened on Thursday
Let’s strip away the noise and look at the scoreboard:
- Dow Jones Industrial Average: +1.33% → new all-time high
- S&P 500: +0.56% → new all-time high
- Nasdaq Composite: -0.30%
- Russell 2000 (small caps): +2.1% on the day, +2.7% on the week → fresh record
- S&P 500 Equal-Weight Index: outperformed the cap-weighted index by the widest margin in months
In English: money left the handful of mega-cap growth names that have carried the bull market since 2023 and flooded into everything else.
Financials, industrials, materials, energy – the “cyclical” corners of the market – led the charge. Visa, Goldman Sachs, Caterpillar, even Freeport-McMoRan posted big moves. At the same time, Alphabet dropped 2%, Nvidia slipped again, and Broadcom – despite beating earnings and guiding AI revenue to double – fell almost 5% after hours.
“The Dow had a great day and, if the trend continues, it could be the beginning of the broadening-out trade we’ve been waiting for.”
Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management
Why Now Feels Different Than the Last Ten Fake-Outs
I’ve lost count of how many times in 2024 and early 2025 we saw “rotation” headlines that lasted exactly two days before the Magnificent 7 roared back. So why does this one feel like it might actually stick?
Three reasons stand out.
First, the macro backdrop finally makes sense. The Fed has now cut rates three times this cycle, inflation is trending toward 2%, and economic growth – while slower – remains positive. Lower rates disproportionately help rate-sensitive cyclical sectors (financials, small caps, real estate) and hurt the long-duration growth trade that dominated when rates were 5.5%.
Second, valuations got ridiculous. At the peak this summer, the Magnificent 7 traded at 35 times forward earnings while the other 493 names in the S&P traded at 16 times. That 19-point gap was the widest in modern history. Mean reversion doesn’t always work, but when the gap gets that extreme, gravity eventually wins.
Third – and maybe most important – sentiment had reached peak pessimism on everything non-AI. Professional investors were the most underweight cyclicals since 2008. When everyone is already on one side of the boat, even a small breeze can tip it over.
Small Caps Are Screaming “Catch Me If You Can”
If you want the clearest proof that something structural is happening, look at the Russell 2000.
The small-cap index is up 2.7% this week alone and just printed its own all-time high. That’s not a typo. Small caps – the poster children for “too risky in a recession” – are making new highs while the economy is still growing.
Why? Because small companies have higher floating-rate debt loads, so lower interest rates help them more than anyone. They also tend to be more levered to the domestic economy, which continues to hold up better than most expected.
In my experience, when small caps decisively break out while large-cap growth rolls over, the rotation usually has legs.
What Thursday Night Futures Are Telling Us
As I write this Thursday evening, Dow futures are up another 124 points. S&P futures are quietly higher. Nasdaq futures? Basically flat.
The overnight tape is confirming the same theme: leadership remains with the cyclical and value trade, not the usual AI suspects.
Even the after-hours movers tell the story. Lululemon jumped 10% on a CEO change (classic “finally something might change” relief rally in a beaten-down consumer name). Broadcom, meanwhile, dropped despite fantastic numbers because… well, because perfection is already priced in at 45 times earnings.
How Investors Should Think About Positioning
Look, I’m not here to declare victory after one day. Markets love to humiliate anyone who gets too confident too fast.
But I will say this: if you’ve been waiting on the sidelines for a better entry points in quality cyclical stocks, financials, or small caps, the window you’ve been waiting for might be cracking open right now.
- Financials still trade at reasonable valuations and benefit directly from steeper yield curves
- Industrials and materials offer inflation protection if growth surprises to the upside
- High-quality small caps with strong balance sheets look particularly interesting after years of neglect
- Equal-weight S&P strategies suddenly make a lot of sense again
At the same time, it’s probably wise to trim positions in names that have tripled on AI hype alone. Not because AI is going away – it isn’t – but because expectations are now lunar.
The Bottom Line
The stock market just flashed one of the clearest rotation signals we’ve seen in years. Money is leaving the handful of stocks that worked perfectly in a high-rate, recession-fear environment and moving into the areas that should work in a growing economy with falling rates.
Whether this lasts a week, a quarter, or becomes the dominant theme of 2026 is anyone’s guess. But after waiting two years for the “broadening out” trade, I’m not mad that it finally decided to show up fashionably late to the party.
The bull market isn’t over. It might just be getting a lot more democratic.
And honestly? That feels pretty healthy.
