CPI "Unbelievable," Brace for 2026 Rotation Trade & Tech's "Nature of the Beast"

Core Viewpoint - The market is experiencing a rally driven by positive sentiment from the CPI report and company performances like Micron, but the sustainability of this rally is uncertain due to ongoing economic factors and market rotations [1][4]. Economic Indicators - The CPI data collection was limited in October and early November, leading to a reliance on estimated data, which may affect the perceived accuracy of economic indicators until the December release [2][3]. - Initial jobless claims were in line with expectations, indicating stability in the job market [4]. Market Trends - There is a noticeable rotation in the market, moving away from high-flying AI stocks towards more defensive and value-oriented sectors [4][5]. - Over the past six months, only 18% of S&P 500 constituents outperformed the index, but this figure rose to 63% in the last month, indicating a shift in market dynamics [5][6]. Small Cap Performance - The Russell 2000 index has shown improved breadth and performance compared to the NASDAQ and S&P 500, suggesting a potential for continued growth in small-cap stocks [6][10]. - Investors are advised against a monolithic approach to the Russell 2000, as the performance of individual stocks can vary significantly [9][13]. Technology Sector Insights - The technology sector is experiencing a reevaluation of valuations, particularly in light of recent earnings reports like Micron's, which highlight strong demand in data centers [14][16]. - There is a concern regarding the sustainability of growth in the tech sector, with free cash flow growth for major companies declining recently, leading to increased reliance on debt financing [18]. Future Outlook - The narrative around AI is expected to broaden in 2026, moving beyond just data centers and focusing on the overall economic impact and productivity enhancements brought by AI adoption [19][20]. - The market may experience volatility characterized by "fits and starts," with significant reactions to both positive and negative earnings reports [5][17].