The Stock Market Is Rotating Out of Big Tech. A December Data Deluge Could Dictate the Next Move.

It was a mediocre week for the stock market. (Michael Nagle/Bloomberg)

Santa Claus has arrived just in time —at least for the Dow Jones Industrial Average. It’s a sign of what’s to come as we head into the end of the year.

On the surface, it was a mediocre week for the stock market. The S&P 500 index was down 0.7% heading into the end of the week, while the Nasdaq Composite had fallen 1.7% on renewed concerns about artificial-intelligence spending. But the Dow, the stodgy blue-chip benchmark, had muscled its way to a 1% rise, though a Friday decline kept it from finishing the week at a record high.

The small-cap Russell 2000 and the equal-weighted S&P 500 also had strong weeks—and that tells you everything you need to know about what’s happening in the market right now. With the Federal Reserve having cut interest rates by a quarter-point on Wednesday, bank deregulation looking like a done deal, and economic data holding up, there was every reason to switch out of AI beneficiaries to economically sensitive stocks.

Created with Highcharts 9.0.1Source: FactSet

Created with Highcharts 9.0.1Dow Jones Industrial AverageS&P 500 IndexNASDAQ Composite IndexRoundhill Magnificent Seven ETFDec. 8Dec. 12-4-2024%

Whether or not that rotation continues—and the stock market can keep rising with it —may depend on an unusually large mid-December economic data dump from the government. The November jobs report comes out on Tuesday, Dec. 16, as opposed to its typical first Friday of the month release. And the November consumer price index, a key measure of inflation, is due on Thursday, Dec. 18, a week later than normal. Both reports were delayed as a result of the government shutdown this fall. They will also include some October jobs and inflation data since both of those reports were canceled.

A modest slowdown in job gains and/or an uptick in the unemployment rate, coupled with more benign data about inflation, could be the dream scenario for cyclical stocks. “If there is this continued Goldilocks environment of a slower labor market but a not precipitous drop, then that should mean a strong start to 2026,” says Nicholas Brooks, head of economic and investment research at ICG, who expects at least two more interest rate cuts next year. “But if inflation remains sticky, we could see more of a wobble in the markets.”

The Russell 2000, which has finally broken out to new highs, could be the biggest beneficiary of that scenario. “Small-caps are still cheap, and sometimes price can be its own catalyst,” says Marta Norton, chief investment strategist at Empower Investments, a retirement plan provider. “But it depends on how much the Fed cuts.”

Much will hinge on where tech stocks go, and that depends, as always, on the AI trade. This past week was ugly, with big losses for Oracle and Broadcom following earnings reports. In the view of Mike Treacy, vice president of risk at clearing and custody firm Apex Fintech Solutions, investors are suffering from a “Fear of Bubble,” or FOB. “Anytime there is a headline that shifts the AI narrative, we see this erratic activity because tech is such a concentrated bet,” he says. “That should result in more volatility.”

Still, that volatility might be confined mostly to tech. After all, the Cboe Volatility Index, or VIX, is trading at the relatively low level of 16—hardly a sign of heightened investor fear. Mark Hackett, chief market strategist at Nationwide Investment Management Group, said he doesn’t see “a bubble or impending doom” in the AI trade, but he added that “growth rates may be slowing and valuations are elevated.”

So keep the rotation going and diversify away from the Magnificent Seven. With a little bit of luck, the stock market could deliver once again in 2026.

Write to Paul R. La Monica at paul.lamonica@barrons.com