As oil prices retreat and U.S. economic growth shows signs of acceleration, cooling inflation has reinforced expectations of Federal Reserve rate cuts. Meanwhile, stock pickers are shifting their focus beyond AI-themed plays, while robust consumer spending continues to fuel the economy. These factors have created a near-perfect environment for companies most sensitive to economic cycles.
Strategists and analysts now predict outperformance in 2026 from banks like JPMorgan Chase (JPM.US), equipment manufacturers such as Caterpillar (CAT.US), and retailers including Gap (GAP.US) and Dollar Tree (DLTR.US). Michael Kantrowitz, Chief Investment Strategist at Piper Sandler, noted, "Investors are beginning to detect early signs of a cyclical bottom in economically sensitive sectors." This suggests financials, industrials, and consumer discretionary stocks could lead another strong year for U.S. equities.
A survey of about 60 economists projects average U.S. growth of 2% next year—modest but sufficient to lift sectors beyond tech. Kantrowitz added, "With improving cyclical data, 2026 may finally see value stocks outperform. We should position early in names with marginal earnings upside."
Market rotation is already underway. Goldman Sachs’ cyclical basket has surged 9.3% over the past month, doubling the S&P 500’s 4.2% gain, while also outpacing defensive plays that briefly led during October-November’s tech pullback. Another Goldman strategy—long non-commodity cyclicals/short defensives—has returned 10% in the same period.
CFRA’s Sam Stovall observed, "Inflows into non-tech cyclicals reflect optimism about economic expansion." The firm forecasts 2.5% 2026 GDP growth, supported by 4.1% retail sales growth and core PCE inflation easing to 2.4%.
Wall Street widely expects cyclical strength to persist. Dennis DeBusschere of 22V Research stated, "This pro-cyclical window won’t last just one or two quarters," favoring banks, retailers, and transports (excluding airlines). The Dow Jones Transportation Average, up 10% in a month, now sits just 0.4% below its November 2024 peak.
US Bank’s Tom Hainlin recommends increasing cyclical exposure without selling tech holdings, anticipating tech will still lead earnings growth in 2026, followed by materials and industrials. Citi strategists led by Adam Pickett advocate overweighting financials—their top cyclical pick—while underweighting consumer staples, noting industrials’ upgrade potential.
However, Pickett cautions that 2026 cyclical gains aren’t guaranteed. An overheating economy could delay or reverse expected Fed easing. "The sustainability of rate cuts through 2026 remains highly uncertain," he warned. Markets currently price in two 2026 cuts, with the Fed upgrading its GDP forecast to 2.3% from September’s 1.8%.
Horizon Investments’ Michael Dickson concluded, "Faster U.S. growth would significantly benefit cyclicals, whose profits are tightly linked to economic activity."
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