Have you ever watched a market rally that felt unstoppable, only to sense a subtle shift underneath the surface? That’s exactly what’s happening right now as we close out 2025. The big tech giants that carried the bull run for years are suddenly under pressure, while forgotten corners of the market are starting to wake up. It’s not a crash—far from it—but a quiet, deliberate rotation that’s catching a lot of investors off guard.
In my experience following markets over the years, these kinds of moves often signal something bigger brewing. They’re rarely random. And this time around, the data points to a classic year-end rebalancing that’s gaining real momentum.
The Big Shift Away From Tech Dominance
Picture this: the benchmark index hit its all-time high back in late October. Since then, it’s barely budged lower overall. But dig a little deeper, and you’ll see a fascinating divergence. The average stock in the index is actually higher now than it was at that peak. How is that possible? Simple—money is flowing out of the handful of mega-cap tech names and spreading across the broader market.
Strategists have noted that sector performance since late October has been almost perfectly inverse to how heavily positioned investors were heading into that period. The areas with the lightest tech and AI exposure are leading the charge, while the former darlings lag behind.
It’s a reminder that markets hate overcrowding. When everyone piles into the same trade, the risk of a pullback grows. And right now, that trade has been artificial intelligence and the so-called Magnificent Seven group.
Which Sectors Are Winning the Rotation
Let’s look at the numbers, because they tell a clear story.
Health care stocks have jumped nearly 7% since late October, making it the top-performing sector by a decent margin. Financials aren’t far behind with gains over 5%, and consumer staples have added a solid 3%. These are classic defensive or value-oriented areas that had been largely ignored during the tech frenzy.
On the flip side, the technology sector itself has dropped close to 7% in the same timeframe. Communication services, another tech-heavy group, has barely managed a 1% gain. The contrast couldn’t be sharper.
- Health Care: +6.8% – Leading the pack with steady demand and defensive qualities
- Financials: +5.3% – Benefiting from stable rates and economic resilience expectations
- Consumer Staples: +3.1% – Reliable performers in uncertain times
- Technology: -6.9% – Hit by valuation concerns and profit-taking
- Communication Services: +1.1% – Mixed performance dragged by mega-caps
Perhaps the most interesting aspect is how predictable this feels in hindsight. Sectors that were underowned are now attracting fresh capital, while the overcrowded trades unwind.
Why This Rotation Is Happening Now
Several forces seem to be converging at once.
First, there’s the valuation question. After years of outperformance, many tech leaders are trading at premiums that make even optimistic investors pause. When growth expectations are sky-high, any hint of slowing momentum can trigger selling.
Second, year-end tax considerations play a role. Investors often harvest gains in winners and rotate into laggards for tax efficiency. It’s a time-honored strategy, and this year the disparity between winners and losers is extreme.
Then there’s the macroeconomic backdrop. With interest rates potentially heading lower in the coming year, rate-sensitive areas like financials and small companies become more attractive. Lower borrowing costs can fuel lending activity and make debt-laden smaller firms more viable.
Performance across sectors has been inversely tied to their positioning in late October.
Market strategists’ observation
That quote captures it perfectly. Crowding creates vulnerability, and we’re seeing the unwind in real time.
Should You Completely Abandon Big Tech?
Not at all. That would be throwing the baby out with the bathwater.
Many advisors still recommend maintaining significant exposure to leading technology companies. Their long-term growth prospects, especially in artificial intelligence, remain compelling. The current pullback might even present buying opportunities for patient investors.
But the key word is broaden. Diversifying beyond the narrow group that’s driven returns for years makes sense from a risk management perspective. No single sector should dominate a portfolio indefinitely.
Your allocation should still remain strong with leading growth names, but it’s certainly healthy to broaden out exposure.
Investment advisor insight
Financials look particularly interesting right now. Banks and insurers benefit from a steepening yield curve and solid economic growth. Health care offers defensive growth through innovation in drugs and medical technology. Both areas appear reasonably valued compared to tech.
The Small Cap Opportunity Everyone’s Talking About
One area that’s generating real excitement is small-cap stocks.
These companies have lagged dramatically during the tech-led rally, partly because higher interest rates hit them hardest. Many small firms carry floating-rate debt, so elevated borrowing costs squeezed margins.
As rates decline, that pressure eases. Suddenly, small caps become more competitive. And importantly, they’re starting from deeply discounted valuations.
Mid-cap and small-cap indices are trading at substantial discounts to their long-term average price-to-earnings ratios—around 30% to 35% below historical norms. Value-oriented segments remain about 8% undervalued relative to the broader market.
- Small caps are highly sensitive to interest rates
- Lower rates improve profitability and borrowing ability
- Valuations are historically cheap after years of underperformance
- Economic expansion favors cyclical smaller companies
In my view, small caps feel overdue for a catch-up move. They’ve been ignored for so long that even modest inflows could drive outsized gains.
What This Rotation Means for 2026
Here’s where it gets really intriguing.
Some market watchers believe this late-2025 rotation could be a preview of broader leadership in the year ahead. If money continues flowing into cyclical and value areas, we might see a more balanced bull market emerge.
That would be healthy. Markets perform best when participation is wide, not concentrated in a few names. A rising tide that lifts more boats reduces overall volatility and creates sustainable gains.
The shift into non-tech cyclicals also suggests investors anticipate continued economic expansion. They’re not hiding in defensives out of fear—they’re positioning for growth in areas that benefit from a robust economy.
| Index/Segment | Relative P/E Discount to 20-Year Average |
| MidCap 400 | 30% |
| SmallCap 600 | 35% |
| Value Stocks | 8% |
| Broad Market | At average |
Those discounts aren’t small. They represent real opportunity for investors willing to look beyond the headline-grabbers.
How Investors Can Position Themselves
So what should individual investors do?
Start by reviewing concentration risk. If a huge portion of your equity exposure sits in just a few mega-cap tech names, consider trimming gradually while adding to undervalued areas.
Diversification isn’t about abandoning winners—it’s about reducing dependency on them. Think of it as portfolio insurance against sector-specific downturns.
Specific ideas worth exploring:
- Quality financial companies with strong balance sheets
- Innovative health care firms in biotechnology or medical devices
- Broad small-cap ETFs for diversified exposure
- Value-oriented funds focusing on reasonable valuations and dividends
- Cyclical sectors poised to benefit from economic growth
Timing matters less than time in the market, but current valuations make a compelling case for gradual rotation.
The Bigger Picture: Healthy Market Dynamics
Stepping back, this rotation feels like a sign of market maturity.
After years of extreme concentration—the narrowest leadership in decades—we’re seeing capital spread more evenly. That’s generally positive for long-term investors.
It reduces the risk of a sharp correction triggered by a few names rolling over. It encourages companies across industries to invest and innovate. And it rewards fundamental analysis over momentum chasing.
Of course, tech isn’t going away. Artificial intelligence will continue transforming businesses and creating value. But monopolizing market gains forever was never realistic.
The most successful investors adapt. They recognize when leadership changes and position accordingly—without abandoning their core convictions.
As we head into 2026, the market appears to be setting up for broader participation. Whether that materializes fully remains to be seen, but the early signs are encouraging.
One thing feels certain: staying flexible and diversified has rarely been more important. The old Wall Street adage about not fighting the tape still holds—but neither should we ignore when the tape starts playing a different tune.
In the end, markets are dynamic. They reward those who pay attention to shifting currents rather than clinging blindly to yesterday’s winners. This year-end rotation might just be the beginning of a more balanced, sustainable advance—one that benefits far more investors than the narrow rally of recent years.
Only time will tell, but the signals right now are worth heeding.
