Talk of the tape: Should investors stick with winners or rotate

Key Concepts

• Idiosyncratic Setup: A market environment where sector performance diverges from typical patterns, requiring a more nuanced investment approach.
• Magnificent Seven/Elite Eight: The group of large-cap technology stocks (originally seven, now expanding) that have driven significant market gains.
• Broadening Playbook: A strategy focused on diversifying investments beyond the leading tech stocks into other sectors.
• Multiple Expansion: An increase in the price-to-earnings ratio of stocks, driven by investor optimism and willingness to pay a premium for earnings.
• Earnings Growth: The increase in a company’s profitability, a key driver of stock performance.
• S&P 500 Forecast: The projected level of the S&P 500 index, currently estimated at 7700.

Market Outlook for 2026: A Shift from Concentrated Gains to Broadening Participation

The discussion centers on the outlook for the U.S. equity market in 2026, specifically addressing whether the investment strategies that worked in 2025 will remain effective. The current S&P 500 price is around 6930, and the conversation highlights a potential shift from concentrated gains driven by a select group of technology stocks to a more broadly based market rally.

The "Idiosyncratic" Market Setup

City’s U.S. Equity Strategist, Scott Kroner, describes the upcoming market environment as “idiosyncratic,” meaning it won’t follow traditional patterns. He argues that while the “Magnificent Seven” or “Elite Eight” (the dominant tech stocks) will continue to be important, a broadening of investment opportunities into other sectors is crucial for achieving double-digit gains in 2026. This contrasts with the concentrated gains seen in 2025, where a small number of stocks significantly influenced overall market performance.

Forecast and Contribution Breakdown

The firm’s current forecast for the S&P 500 is 7700, representing a roughly 10-11% gain from current levels. Kroner explains that achieving this target will require a combination of continued performance from the “Elite Eight” and a broader market rally. He estimates that the “Elite Eight” could contribute approximately 40% of the index’s gains, while the remaining 60% will come from other sectors benefiting from productivity gains driven by AI and broader economic factors. He emphasizes the need for “at least participation” from the “Elite Eight,” rather than relying on them to lead the market. As Kroner states, “You need to think about this index in sort of a 6040 lens.”

Sector Upgrades and Opportunities

City has recently upgraded its outlook on several sectors, including:

• Health Care: A more constructive view is being taken on this sector.
• Banks: Maintaining an overweight position.
• Tech: Maintaining an overweight position.
• Industrials: A more constructive outlook is emerging.
• Small and Mid-Cap Stocks: Increased positivity regarding the outlook for these companies.

These upgrades signal a belief that opportunities exist beyond the large-cap technology sector.

Earnings Growth vs. Multiple Expansion

The discussion addresses the drivers of potential market performance, specifically the roles of earnings growth and multiple expansion. Kroner highlights a 320 earnings estimate for the S&P 500 index, placing City at the high end of sell-side strategist forecasts (currently at 313). He notes that, surprisingly, only the “Elite Eight” have seen earnings estimates increase since the beginning of the year; other sectors experienced setbacks around April due to tariff talks and are still recovering.

He emphasizes that continued growth expectations for AI-related companies, coupled with a broadening playbook into more traditional economic-sensitive sectors like Industrials, Financials, and Healthcare, will be key. The strategist acknowledges the importance of multiple expansion, but stresses the need for fundamental support from earnings growth.

Value-Oriented Sectors and Performance Potential

The conversation touches upon traditionally value-oriented sectors like Materials, Energy, Real Estate, and Utilities. While these sectors have a significant mathematical weight in the index (comparable to Industrials and Health Care), their performance will be crucial for achieving broader market gains. The discussion highlights that earnings growth and macro factors will be primary drivers for these sectors, rather than relying solely on multiple expansion.

Logical Connections and Synthesis

The conversation flows logically from an assessment of the current market situation (low volume, holding pattern) to a forecast for 2026. The key argument is that the conditions that drove market performance in 2025 – concentrated gains in a few tech stocks – are unlikely to be sustainable. Instead, a broadening of participation across sectors, supported by earnings growth and AI-driven productivity gains, will be necessary to achieve double-digit returns. The 60/40 framework (40% contribution from the “Elite Eight,” 60% from other sectors) provides a concrete illustration of this shift.

The main takeaway is that investors should consider diversifying their portfolios beyond the leading tech stocks and explore opportunities in sectors that are poised to benefit from broader economic trends and technological advancements.

Notable Quote

“You need to think about this index in sort of a 6040 lens, where you’ve got the 40% of the index you can attribute to the the AI elite eight playbook, and then the other 60% that’s going to be representative of this broadening thesis.” – Scott Kroner, City’s U.S. Equity Strategist.