MW These overlooked indicators say tech stocks may not lead the market in 2026
By Jamie Chisholm
Tech sector is over-owned and vulnerable to being hit with 'loser' tag, says Wall Street veteran
Jensen Huang's Nvidia is at the vanguard of the big tech rally in recent years. The sector may struggle in 2026 says Jim Paulsen.
Early futures action suggests U.S. stocks will start the new year on the front foot, with AI-related plays leading the charge.
However, Jim Paulsen reckons that technology shares - part of what he describes as "new era investments" - may likely underperform the broader market in 2026.
His reasoning extends beyond the well-worn concerns about Big Tech. Yes, traders may be overweight the sector, and parts are richly valued in terms of price-to-earnings multiples, but such factors have caused only a modicum of exposure reduction by investors so far.
Instead, writing in his Paulsen Perspectives blog, the Wall Street veteran sets out a number of "less-followed warning signs surrounding technology stocks, which merit some consideration."
First is the danger that new era stocks stop tracking new era spending. Paulsen takes the level of new era economic spending from the GDP accounts, defining it as investment spending on information processing equipment and intellectual property products.
As the chart shows, most of the time the prices of technology stocks have risen relative to underlying new era economic spending. But three times in the last 10 years the ratio has moved sideways or declined, "leading each time to a period of significant underperformance by tech stocks," says Paulsen.
We can see that since late September, S&P 500 tech stock appreciation has again only been matching the gains in economic new era spending. "Since tech stocks are no longer outpacing new era spending, does this suggest another period of tech stock underperformance is nearing?" Paulsen asks.
Another issue to watch is corporate liquidity. Paulsen also produces the following chart - which illustrates the relative total return performance of the S&P 500 technology sector with the ratio of total corporate cash to nominal GDP - and suggests it shows that "an aspect of technology stocks not widely recognized - they are driven by excess cash!"
The two major technology bull markets - 1990s and again since about 2014 - have been driven by expanding cash balances. But Paulsen notes that since the end of 2024, the U.S. corporate cash to GDP ratio has rolled over, and he suspects that as short-term interest rates decline further, the corporate liquidity ratio will fall even more during 2026.
"Tech investors beware! At least since 1990, once corporate cash dries up - the stock market's technology miracle may suffer a pause," says Paulsen.
He also sees a correlation between tech stock rallies and research and development spending booms. For example, when R&D spending declined relative to overall real GDP in 2022, S&P technology stocks began trailing the overall S&P 500 total return, Paulsen notes. However, the relationship has broken down since the fourth quarter of 2022.
Source: Paulsen Perspectives
"Perhaps R&D will soon pick up again and the gap will close. Or maybe, the recent lapse of R&D support for real GDP growth implies a period of upcoming underperformance among new era S&P 500 sectors?" Paulsen ponders.
Finally, there's another point Paulsen makes about new era stocks' relative attractiveness. He suggests that if the tech sector does start to meaningfully falter this may deliver a psychological shift among investors whereby the erstwhile winners are given the losers tag. That's a problem for a sector so heavily owned. And under these circumstances it's likely alternative plays like value, small and medium cap, and foreign stocks may outperform.
Paulsen stresses that none of the above mean a crash is imminent for technology stocks. "Rather, at worst, a rising list of troubling indicators could be suggesting that tech stocks may soon relinquish their long-time leadership position."
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is little changed, while oil prices (CL.1) slip, silver (SI00) is up 5% and gold futures (GC00) are also rising.
Key asset performance Last 5d 1m YTD 1y S&P 500 6845.5 -1.25% -0.17% 0.00% 16.65% Nasdaq Composite 23,241.99 -1.57% -0.90% 20.36% 20.36% 10-year Treasury 4.163 2.80 6.10 -0.90 -40.50 Gold 4401.7 -2.30% 3.86% 1.60% 64.78% Oil 57.37 0.77% -4.61% -0.07% -22.55% Data: MarketWatch. Treasury yields change expressed in basis points
On Jan. 3, we'll be sending you a special edition of Need to Know. It will be the first issue of our weekly Don't Short Yourself newsletter - which will offer smart tips to help you earn, stack and grow your money. Subscribe to Don't Short Yourself for free here to receive the newsletter every week, starting on Jan. 27.
The buzz
U.S. economic data due Friday includes S&P final U.S. manufacturing for December, due at 9:45 a.m. Eastern.
Warren Buffett told CNBC that Berkshire Hathaway $(BRK.B)$ has the best odds of any company for lasting a century after he stepped down as CEO.
China's BYD (CN:002594) sold 4.6 million vehicles in 2025, likely surpassing Tesla $(TSLA)$ to be the world's biggest EV maker, according to Bloomberg.
In his latest trade climbdown, U.S. president Donald Trump said he would delay tariffs on some household furniture until January 2027.
Hong Kong (HK:9888) and U.S.-listed $(BIDU)$ Baidu stock jumped on a report the Chinese tech company has filed for an initial public offering of its AI chip business.
The U.K.'s FTSE 100 UK:UKX blue-chip index hit the 10,000 level for the first time as mining stocks and banks continued to find favor.
Best of the web
Everyday traders go from fringe players to dominant market force.
Here's (almost) everything Wall Street expects in 2026.
The condo market hasn't been this bad in over a decade.
The chart
Source: Goldman Sachs
U.S. financial stocks had a good 2025, with the popular State Street Financial Select Sector SPDR ETF XLF up about 14%. Banks led the way - Citigroup's stock (C) jumped 67%, JPMorgan's $(JPM)$ surged 34% - lifted by hopes for deregulation, more capital markets business and an improving economy. But the chart from Goldman Sachs's economics team suggests another reason investors fancy financials: they think it's the sector for which AI will reduce worker headcount by the most, potentially boosting profits.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name NVDA Nvidia TSLA Tesla TSM Taiwan Semiconductor Manufacturing NIO NIO GME GameStop PLTR Palantir Technologies MU Micron Technology AMD Advanced Micro Devices AAPL Apple AMZN Amazon.com
Random reads
Striking a pose down-under.
Florida's tumbling iguanas.
China plans to boost birth rates with condom tax.
Ooh la la. Clooney et Trump se disputent violemment.
-Jamie Chisholm
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 02, 2026 06:43 ET (11:43 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments