The market is changing. It’s still a bull market. But it’s transforming into something quite different at this juncture.
The economy is the change agent. The fundamental backdrop to this market is evolving from one of slow but steady growth to a much more robust economy. And that changes the math.
The transformation is already upon us.
In this bull market, which began in October of 2022, the S&P 500 is up over 90%. But the gains are only that high because of technology. While the S&P index has returned an impressive 91% with an average annual return of 22%, the “Magnificent 7” stocks delivered an average return of 336% over the same period.
Because the S&P 500 is cap-weighted, those seven stocks alone account for about one-third of the index. Nvidia (NVDA) alone accounts for nearly 8% of the S&P. For perspective, the entire energy industry accounts for about 3% of the index. Only a few sectors outperformed the S&P in this bull market so far, with technology lifting the index much higher than it would otherwise be. The rest of the market has made much less impressive returns.
But things are changing. Over the past three months, seven of the eleven S&P 500 sectors have outperformed the index. And none of them are technology. Top-performing sectors are in cyclical industries, including energy, materials, industrial, and consumer discretionary. That’s no accident.
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For most of the bull market so far, the economy was okay but not great, delivering between 2% and 2.5% GDP growth. The artificial intelligence catalyst drove the market higher while the real economy sort of meandered. That situation is changing. In the second and third quarters of 2025, GDP grew 3.8% and 4.3%, respectively. The Atlanta Fed estimates fourth-quarter GDP growth will be 5.1%.
The technical definition of a recession is two consecutive quarters of negative GDP growth. What is three consecutive quarters of robust growth considered? Of course, the financial media always seems to pooh-pooh the U.S. economy. I guess it’s chic to be negative. But the market is reporting a different story. And that story could take off in 2026.
While estimates vary, the “experts” are on average forecasting GDP growth of around 2.1% in 2026. That would actually be slower growth than in recent years. Anything can happen, of course. But for that forecast to prove accurate, there would have to be a significant economic slowdown. And there is no real evidence of any such thing.
The Fed is in a rate-cutting cycle. There are also significantly cheaper oil prices, lower interest rates, and there should be far less tariff uncertainty than there was last year, despite the current European Union (EU) issue. Plus, positive effects of tax cuts and deregulation should have a bigger impact in 2026.
The chances are good that 2026 will feature the strongest economy of the bull market so far. While the market indexes will likely go wherever technology goes, real economy companies are poised to shine. After years of an artificial-intelligence-driven market, many previously neglected stocks should benefit in the old-fashioned way this year, from rising demand and profits.
That will benefit certain more cyclical stocks that also happen to be much more cheaply valued than the overall market. The bull market is overdue to broaden beyond technology in the year ahead. The market is already anticipating the change.
While the media and the experts are late to the party, it’s still a good time to buy cheaper stocks with momentum in cyclical industries and be ahead of the pack.
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