AI Powered the Market Rally. Watch These Sectors for Continued Growth.

(David Paul Morris/Bloomberg)

Key Points

• The stock market rally is broadening beyond artificial intelligence, with cyclicals, financials, and energy services showing strong performance.
• Strategists anticipate double-digit gains in 2026, with some S&P 500 targets as high as 8000, driven by sector rotation.
• Investors are repositioning into reflationary sectors such as energy, materials, retail, and homebuilders.

Stocks spent the past two weeks bouncing back from a tough November start, and for once artificial intelligence doesn’t deserve all the credit. That’s good news for the rally’s future, as it’s about to enter its fourth year.

Multiple firms have put out their 2026 outlooks already, and plenty of strategists see another year of double-digit gains to come, with year-end targets for the S&P 500 index as high as 8000. And while AI stocks have done most of the heavy lifting during this bull market, continued growth would be a lot easier if other sectors could also start commanding higher multiples and more investor confidence.

Luckily that shift might finally be underway.

“If this bull market is going to broaden and stay durable, rotation is the oxygen, and now we’re seeing it worldwide,” writes Macro Risk Advisors Chief Technical Market Strategist John Kolovos in a note from this weekend. “Leadership broadened everywhere into cyclicals, with banks, industrials, semis, and metals/mining generating the most consistent clusters of fresh relative highs. In the U.S., financials dominated (broker-dealers, custody banks, regionals, and consumer finance) alongside energy services and selective consumer strength in apparel, casinos, and autos.”

Investors had been worried that the AI trade’s troubles—vast capital spending, increased competition—could mean an end to the rally, but that doesn’t have to be the case if other sectors pick up the slack.

“In other words, the next phase of this bull market is not about getting the index right; it’s about rotation: cyclicals are in control, defensives are breaking down, and leadership is broadening globally,” Kolovos writes. “If rotation persists and commodities continue to act like the early stages of a secular bull market, as part of a reflationary trend (not inflationary), breadth and sustainability will follow.”

Wells Fargo analyst Ohsung Kwon believes similarly: He thinks that AI will dominate the second half of 2026, but the first half will be a different story, with “reflationary sectors (e.g. Energy, Materials, Retail) to outperform.”

Another technical take, from Oppenheimer’s Ari Wald, suggests that homebuilders are also a good idea as investors lean into rotation, since the sector has seen signs of stabilization and should benefit from investors’ ongoing appetite for risk in the coming quarters.

Investors do seem to still be happy to take risks, even if outside the usual Big Tech names. While it’s true that crypto remains in a tough spot, it’s worth noting that even during November’s declines, healthcare and utilities shone, the former thanks to volatile biotech stocks and the latter due to its AI connection. At the same time, staples suffered, meaning investors weren’t really getting defensive, just repositioning.

With the New Year just weeks away, a new cohort of Wall Street favorites could be winners.

Write to Teresa Rivas at teresa.rivas@barrons.com