By Sam Goldfarb
Investors are finally showing love to companies outside of the tech sector.
Growing economic optimism, along with a more cautious view of the artificial-intelligence build-out, is prompting a major "rotation trade" on Wall Street, with investors selling technology stocks and buying up the shares of most every other type of business.
The shift has only picked up steam in the early days of 2026, pushing the blue chip Dow Jones Industrial Average toward a big 50000-point milestone, even as the tech-heavy Nasdaq composite has struggled for momentum.
Thursday's moves offered one example. Defense stocks rallied after President Trump called for a military budget of $1.5 trillion. Trump's proposal, made in a social-media post late Wednesday, was more than $500 billion above what the Pentagon has been expected to get this fiscal year, providing a boost to companies across the defense sector.
Among those, L3Harris Technologies gained 5.2%, Lockheed Martin climbed 4.3%, and Northrop Grumman rose 2.4%.
That marked a rebound for the stocks, which fell during Wednesday's session after Trump lashed out at U.S. weapons manufacturers, threatening to restrict their ability to pay dividends or buy back stock until they produce "a superior product, on time and on budget."
He also threatened to halt business with contractor RTX. Shares of the Arlington, Va.-based company, rose 0.8% Thursday. But they remained down slightly for the week, well behind peers such as L3Harris, which is up 7% over that period.
The crosscurrents resulted in a mixed day for major indexes. The Dow climbed 0.6%, or about 270 points, to 49266 -- just shy of a record set Tuesday. Nine out of the S&P 500's 11 sectors also rallied. But declines in tech shares meant that the broad market index only ticked up less than 0.1%, while the Nasdaq lost 0.4%.
The divergence reflected a recent theme. For most of last year, tech stocks were huge outperformers, buoyed by investor excitement about artificial-intelligence breakthroughs. Toward the end of the year, though, investors started approaching the sector more carefully and looking elsewhere for opportunities.
Thursday was "another big rotation day," said Keith Lerner, chief investment officer at Truist Advisory Services. "You have portfolio managers looking for other areas, especially now if you think that the economy has a bit of an uptick."
Investors haven't completely abandoned tech stocks so much as they have grown more discerning.
Alphabet, for example, has continued to climb, reflecting a growing belief among investors that the tech giant can outduel competitors such as OpenAI, both defending its search business while making strides with its Gemini artificial-intelligence app.
Shares of the Google parent rose 1.1% Thursday to a record, bringing the company's market capitalization close to $4 trillion. At the same time, shares of Oracle, which has become closely linked to OpenAI as a cloud-computing provider, extended their recent slump, falling 1.7%.
Thursday's big gainers extended well beyond just the defense sector, including companies such as Home Depot and Sherwin Williams, which could benefit from Trump administration policies aimed at boosting the housing market. The Russell 2000 index of smaller stocks added 1.1%, giving the small-stock benchmark its first record since Dec. 11.
The S&P 500's best-performing sectors this week are consumer-discretionary and materials companies -- both seen as especially exposed to the U.S. economy.
Major U.S. indexes have all gained since the start of the year -- with the Dow industrials up 2.5% and the S&P 500 rising 1.1% -- raising hopes the rally can continue into 2026, as Wall Street has predicted.
For six of the past seven years, the S&P 500 has moved in the same direction during the first five trading days in January as it did for the rest of the year. Over the long term, the first week of trading and the full-year performance move in the same direction 68% of the time, according to Dow Jones Market Data research going back to 1950.
January is a closely watched month for financial markets, with some traders believing that rising share prices this month can predict positive returns for the rest of the year. Stocks typically log gains in January, as investors rush to take their positions for the months ahead.
Investors are poised to get an important update on the economy on Friday when the Labor Department releases its December jobs report. Economists surveyed by The Wall Street Journal expect that the economy added 73,000 jobs, up from 64,000 in November. They also expect the unemployment rate to tick down to 4.5% from 4.6%.
Investors will also be watching the Supreme Court, which could potentially rule on the legality of many of the Trump administration's tariffs.
Despite a recent slowdown in jobs growth, most investors expect the U.S. economy to continue expanding this year. Supporting that view, data released on Thursday showed that slightly fewer-than-expected Americans filed new claims for unemployment benefits last week.
That news helped push up U.S. Treasury yields and the U.S. dollar. The yield on the 10-year U.S. Treasury note settled at 4.182%, according to Tradeweb, up from 4.137% Wednesday.
"Labor markets have continued to muddle along, but we still haven't seen anything to suggest that cooling is accelerating into something more problematic," Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets, said in a note on Thursday. "Permanent layoffs and jobless claims remain low...and a 4.6% unemployment rate is still low by historical standards."
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
January 08, 2026 19:00 ET (00:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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