Wall Street outlook for 2026: Will Big Tech dominance fade in US markets? What analysts have to say

Core Viewpoint - Major Wall Street firms are advising investors to diversify their portfolios beyond the "Magnificent Seven" tech stocks, focusing on sectors like health care, industrials, and energy for 2026, as concerns grow over the sustainability of Big Tech's recent performance [2][4] Group 1: Sector Rotation - Bank of America and Morgan Stanley are steering clients towards sectors such as health care, industrials, and energy, moving away from megacap technology stocks like Nvidia [2][4] - Analysts are questioning the ability of Big Tech to maintain the nearly 300% rally seen over the past three years due to elevated valuations and disappointing earnings from AI-linked companies [2][4] - The small-cap Russell 2000 Index has gained 11% since November 20, while the Magnificent Seven index has risen by approximately half that amount, indicating a shift in market focus [3][4] Group 2: Market Sentiment and Economic Outlook - Improving confidence in the US economic outlook is reinforcing the case for rotation into previously underperforming areas of the S&P 500 [2][4] - Strategas Asset Management expects a pronounced sector rotation into underperforming financial and consumer discretionary stocks in 2026 [3] - Morgan Stanley's research team believes that while Big Tech can still perform adequately, it will lag behind sectors like consumer discretionary and small- and mid-cap stocks [3][4] Group 3: Earnings Forecasts and Market Dynamics - Goldman Sachs forecasts S&P 493 earnings growth to rise to 9% in 2026 from 7% this year, with the contribution of the seven largest companies to overall S&P 500 earnings projected to decline from 50% to 46% [3][4] - The Federal Reserve's recent interest rate cuts are expected to support economically sensitive sectors, with utilities, financials, health care, industrials, energy, and consumer discretionary stocks showing solid gains this year [3][4] - Max Kettner from HSBC Holdings emphasizes the importance of both tech and other sectors participating in market growth, suggesting this trend will continue in the coming months [3][4]