Markets Brief: When Will We Get a Real Stock Market Rotation?

The stock market’s performance for 2025 is now officially in the record books. It was a good year for investors, but for the many prognosticators who expected a change in the market leadership away from Big Tech and mega-cap stocks in general, that call once again turned out to be way off the mark.

Of course, a big part of the story is the artificial intelligence trade as a driver of technology stocks. As Morningstar’s Bella Albrecht wrote last week:

Of the Morningstar US Market Index’s total 17.4% gains in 2025, 7.0 percentage points—or 40%—came from the tech sector, and another 3.1 percentage points—18%—came from communications stocks. Put together, nearly 60% of market gains in 2025 can be attributed to the two sectors.

To some degree, it’s a bit of a Groundhog Day performance for stocks. The imbalance in market returns in 2025 largely mirrored that seen in 2023 and 2024.

No rotation there. And check out how this played out in terms of the ETF returns. Here’s a look at Vanguard Mega Cap Growth ETF MGK

Throughout this period, many analysts continue to call for a rotation to other parts of the market, namely small-company stocks and value stocks. But aside from a month or two here and there, those forecasts haven’t played out.

What could spark a sustained rotation? Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth, offers up four elements of a rotation scenario:

• Overvaluation: There is no question that current valuations of many of the AI-related companies are inflated relative to the broad market, or more so, the underperforming segments of the market. At some point, valuations of these companies may reach a point at which investors lose confidence that future expectations for sustained growth can be met and will stop investing in them.
• Undervaluation: If AI-driven stocks continue to see multiple expansion ahead of what the broad market sees, value-driven investors may begin favoring the undervalued segments of the market. One example of this is the healthcare sector, which has seen earnings growth well ahead of the broad market but stock price appreciation well below that of the broad market.
• Diversification: Broad market indexes, like the S&P 500, currently have the top 10 names accounting for around 40% of their market value. Of those top 10 names, eight have benefited from the AI-driven technology rally. Investors may believe they’re getting diversification here, but if the eight largest names are all tied to the same returns driver, they clearly are not.
• Is it a bubble? In my opinion, the answer is “Not yet.” But at some point, the “buyers” of AI have to show meaningful efficiency gains, profit increases, or other benefits to justify their continued AI investment, and we just have not seen this yet. If the buyers don’t begin to show substantive returns on AI purchases, the sellers will eventually feel the pain, and their future projections will have to decrease accordingly.

IPOs to Watch in 2026

The IPO market started cooking in the second half of 2025, only to be frozen by the federal government shutdown in October that halted the IPO filing and approval process. But many observers expect 2026 to pick up where the market left off before October.

Our colleagues over at PitchBook took a look at one segment of the market that seems ripe for new listings in 2026: cybersecurity. Jacob Robbins wrote:

Robbins digs into nine cybersecurity startups that could make their way to the public market this year. Check out the story here.

Clean-ish Jobs Data on Deck

Speaking of the government shutdown, one of the other casualties was official economic data. For the most part, October data was not collected, and November data appears to have been hit or miss in quality. Federal Reserve Chair Jerome Powell said officials would view those early reports with a “somewhat skeptical eye,” and preferred to wait for the release of December data before making decisions about the state of the economy.

Well, it is now January, and this Friday will bring the December jobs report. While it’s possible there could be some lingering distortions, economists expect a relatively clear picture of the state of hiring in the US economy. This could be crucial data. Even though some Fed officials appear to be hesitant to cut rates again this month, another weak reading could tilt the balance toward more rate cuts sooner. Economists forecast a reading much like November’s. Payroll employment is expected to rise by 65,000 in December following a 64,000 gain in November, according to FactSet. The unemployment rate, meanwhile, is seen dipping back to 4.5% after having jumped to 4.6% in November.

For upcoming key economic reports, visit our weekly markets calendar.