Why the 2025 'Rotation' Never Happened — Tech Led, and 2026 Followed Suit

Many investors entered 2025 expecting a broad market rotation away from growth and into value, cyclicals and small caps. That shift largely failed to materialize. Instead, mega-cap technology names and AI-related stocks continued to outperform, driven by robust earnings, persistent industry-level momentum and strong fund flows into tech-focused ETFs. Earnings beats from semiconductor, cloud and software companies reinforced investor confidence, while narrative forces — AI adoption, cloud migration and enterprise software upgrades — provided structural support.

Macro conditions also played a role. Interest rates stabilized after mid-2024 volatility, reducing the yield pressure that normally punishes longer-duration tech profits. At the same time, consumer and corporate spending proved resilient enough to sustain demand for digital transformation, cloud services and chips. Market breadth, however, remained narrow: a handful of giants accounted for a substantial share of benchmark returns, leaving many traditionally cyclical sectors lagging.

ETF and passive product flows amplified the concentration. Index-tracking funds and thematic ETFs funneled capital into technology buckets, reinforcing the leadership of a relatively small group of names. Small-cap and value indices underperformed, and attempts at a durable sector rotation were intermittently reversed by new data or headline-driven risk-on rallies.

Looking into 2026, the pattern persisted. Continued enthusiasm for AI, ongoing semiconductor investment cycles and steady enterprise spending kept the spotlight on technology. But the market's narrow leadership raises risks: stretched valuations among top names, weakening breadth, and potential sensitivity to any macro surprise — notably a sharper-than-expected rise in yields, an earnings disappointment from a marquee tech company, or regulatory developments — could trigger a more meaningful rotation.

For investors, the takeaway is pragmatic: acknowledge the structural tailwinds for tech and AI but manage concentration risk. Diversification, active selection within value and cyclicals that are showing real earnings improvement, and close monitoring of macro indicators and central bank guidance remain essential. A genuine, sustainable rotation requires a shift in both earnings momentum and broader investor flows — neither of which fully arrived in 2025 or early 2026.