When the closing bell rang on January 2, 2026, the first trading day of the new year, a subtle but potentially significant shift was visible in the market's internal dynamics. The Dow Jones Industrial Average rose 319 points, or 0.66%, to finish at 48,382. The S&P 500 edged up a modest 0.19%. But the tech-heavy Nasdaq Composite? It actually slipped 0.03%.

For a market that spent the past three years marching to the beat of artificial intelligence and the "Magnificent Seven" technology giants, this divergence caught the attention of strategists and portfolio managers. Could 2026 be the year that value and cyclical stocks finally have their day?

The Rotation in Real Time

By the time the opening bell rang on January 2, a wave of buying in industrials and financials offset continued weakness elsewhere. The rotation was visible across multiple dimensions:

Industrials led the charge: Companies like Caterpillar, Boeing, and 3M—stalwarts of the old economy—outperformed their technology counterparts. Infrastructure spending expectations and a manufacturing recovery narrative provided fundamental support.

Financials found their footing: JPMorgan Chase, Bank of America, and other financial giants caught a bid as investors positioned for a steepening yield curve and improved loan demand. The prospect of regulatory relief under the new administration added to the bullish case.

Technology lagged: While semiconductor stocks like Nvidia and Micron rallied, the broader tech sector struggled. Microsoft fell 2%, and several other mega-cap tech names ended the day in the red.

What's Driving the Shift

Several factors are combining to favor cyclical and value stocks entering 2026:

Valuation concerns in tech: After three consecutive years of 20%+ gains in the Nasdaq, many technology stocks are trading at historically elevated valuations. The S&P 500's CAPE ratio exceeded 39 in December—a level last seen during the dot-com bubble. Investors are naturally looking for cheaper alternatives.

Rate cut expectations favor financials: With the Federal Reserve expected to continue cutting rates in 2026, banks stand to benefit from lower funding costs and potentially improved loan demand. The anticipated easing cycle is a direct tailwind for sectors that thrive on lower borrowing costs.

Infrastructure and manufacturing tailwinds: Government spending on infrastructure, combined with reshoring of manufacturing capacity, is creating demand for industrial goods. Defense spending is also rising, benefiting aerospace and defense contractors.

AI enthusiasm maturing: The initial euphoria around artificial intelligence is giving way to more measured assessments of which companies will actually generate returns from their AI investments. Investors are becoming more discerning, no longer buying anything with an AI angle.

The Undervalued Sectors

Multiple analyst reports have identified sectors trading below fair value as 2026 begins:

Financials: The Financial Select Sector SPDR Fund (XLF) gained approximately 13% in 2025, lagging the S&P 500 despite improving fundamentals. Banks like Bank of America, Capital One, and PNC Financial are highlighted as particularly undervalued relative to sector averages.

Healthcare: After years of underperformance, healthcare stocks are trading at valuations that many analysts consider attractive. Charles Schwab maintains a favorable view of the sector, citing both value and defensive characteristics.

Industrials: While the XLI ETF roughly matched the S&P 500's performance in 2025, pockets of value remain. Boeing, Union Pacific, and Honeywell all trade below sector-average forward P/E ratios.

The Case for Continued Rotation

Several factors could sustain the rotation into cyclicals through 2026:

  • Earnings breadth expanding: While the "Magnificent Seven" drove the majority of S&P 500 earnings growth in 2024 and early 2025, analysts expect earnings gains to broaden across sectors in 2026. More sectors contributing to growth could shift investor attention away from tech.
  • Midterm election history: Midterm election years (which 2026 is) have historically seen increased market volatility and sector rotation. Political uncertainty often favors defensive and value-oriented strategies.
  • Dollar weakness helping exporters: The dollar's 9% decline in 2025 makes American-made industrial goods more competitive internationally. This benefits manufacturers and exporters disproportionately.

The Bull Case for Tech

Of course, one day's trading action doesn't make a trend. The technology sector retains powerful structural advantages:

AI capex continues: Major technology companies have committed hundreds of billions of dollars to AI infrastructure. This spending supports chip makers, cloud providers, and technology services companies.

Earnings growth remains strong: The "Magnificent Seven" are projected to grow earnings 22.7% in 2026, above the broader market average. Strong fundamentals can justify elevated valuations.

CES catalysts ahead: Nvidia CEO Jensen Huang's Monday keynote and other CES announcements could reignite tech enthusiasm. Major product cycles in AI, computing, and consumer electronics continue to provide growth opportunities.

How to Position for Rotation

Investors considering positioning for continued rotation have several options:

Sector ETFs: Funds like XLF (financials) and XLI (industrials) offer broad exposure to cyclical sectors. Equal-weighted S&P 500 funds reduce concentration in the largest tech names.

Value ETFs: Funds focused on value factors naturally tilt toward cyclical sectors and away from high-growth tech.

Individual stock selection: Within sectors, opportunities exist to own quality companies at reasonable valuations. The key is distinguishing between cheap stocks and value traps.

Diversification: Rather than making an all-or-nothing bet on rotation, maintaining exposure to both growth and value provides balance as the market's preferences shift.

The Bottom Line

One day does not define a year, but the first trading session of 2026 offered a glimpse of what a market less dominated by technology might look like. Industrials, financials, and other cyclical sectors have fundamental catalysts that could sustain outperformance. For investors who spent the past three years chasing AI and the Magnificent Seven, the message may be clear: it's time to look beyond tech for opportunities in 2026.