2026 US stocks do not bet on AI! Goldman Sachs predicts the end of the Mag7 era, cyclicals on the rise

The true main theme of the US stock market in 2026 is not AI nor rate cuts, but a “market-driven economic rotation.” From Bank of America, Morgan Stanley, Goldman Sachs to BCA Research, almost all top-tier strategy teams are signaling the same message: capital will shift from story-telling assets to those more sensitive to the real economy. Goldman Sachs predicts the end of the Mag7 era, with cyclicals set to become the biggest dark horse next year.

Three Structural Reasons Making Way for Mag7

The core driver of the 2026 US stock rotation is not sentiment but structure. Over the past three years, core tech stocks have surged nearly 300%, and AI capital expenditure has moved from the “imagination phase” to the “return verification phase.” The market is beginning to realize that even if AI is correct, stock prices may already be far ahead of fundamentals. Recent earnings reports from AI-related companies like Oracle and Broadcom have underscored the issue: it’s not poor performance, but “not good enough.” In the market, “not good enough” is a negative signal.

About two-thirds of the global stock market cap is concentrated in US equities, and 40% of US market cap is focused on just ten stocks. The fate of these ten stocks is almost entirely betting on the same narrative: becoming winners in the generative AI (gen-AI) wave. This means over a quarter of the global stock market cap is directly exposed to the risk of a single failed bet. This historically narrow rally makes any loss of confidence potentially trigger intense volatility.

On the other hand, the Russell 2000 has rebounded double digits from its lows, and equal-weight indices like the S&P 500 are beginning to outperform market-cap weighted indices. Financials, industrials, energy, and non-essential consumer goods are quietly rising. This indicates that capital is not leaving but shifting gears. Non-tech sectors, previously ignored over the past two years, now show significant valuation discounts relative to tech stocks, providing a basis for rotation.

Three Major Drivers of the 2026 US Stock Rotation

Valuation Correction Pressure: Tech stocks surged 300% and entered a return verification phase, with “not good enough equals negative” becoming the new normal.

Concentration Risk Release: 25% of global market cap is betting on a single AI narrative, and diversification is becoming the rational choice.

Economic Expectation Dislocation: The market is pricing in 2.0% growth, but Goldman Sachs forecasts 2.5%, and cyclicals are severely undervalued.

Goldman Sachs’ 2.5% GDP Forecast Hides Insights

Many believe Goldman Sachs is bullish on cyclicals because “the economy will explode,” but their core judgment is: the market is underestimating the economic growth of the 2026 US stock market. The consensus expects US GDP in 2026 to be around 2.0%, while Goldman forecasts 2.5%. The gap isn’t large, but it has a significant impact on asset pricing, as the current relative valuations of cyclicals, defensive, and growth stocks are still anchored to the assumption of “low growth, low elasticity.”

This is the essence of rotation. Rotation isn’t because a sector suddenly improves but because the previous “bad expectations” are being gradually disproven by reality. Especially the most suppressed areas: non-residential construction, industrial capital expenditure, and physical investment. Against the backdrop of fiscal stimulus, investment incentives, and leading indicators rebounding, the odds for these assets are quietly shifting.

Goldman’s judgment is based on multiple leading indicators improving. The ISM manufacturing index is stabilizing, new orders are rising, and corporate capital expenditure intentions are strengthening. While these signals are less eye-catching than tech earnings reports, they reflect real improvements in the physical economy. When the market still prices in 2% growth, actual growth reaching 2.5% will lead to cyclicals’ earnings exceeding expectations, and this positive surprise will drive valuation adjustments.

Hedge Funds “Descending” to Seek Genuine Alpha

If you only look at rotation from a stock market perspective, you miss a more important signal: smart money is fighting for the “source of information.” When Balyasny, Citadel, Jane Street, Jain Global start buying natural gas assets, leasing oil tanks, and engaging in energy storage, they are not betting on oil prices but on three things: financial market information has been over-explored, truly leading data exists only in the physical world, and macro turning points will first manifest in supply and demand rather than K-line charts.

This “descending” trend is highly instructive. Top hedge funds possess the most advanced quantitative models and fastest trading systems, yet they choose to invest heavily in tangible physical assets. This indicates that when alpha in financial markets is flattened, capital returns to the “real economy” to find answers. This aligns with the logic of the 2026 US stock rotation—two sides of the same coin.

BCA Research offers a very counterintuitive but crucial insight: the biggest risk in 2026 is not an economic collapse first but a market crash first. Because the US economy is now supported by about 2.5 million “excess retirees” benefiting from the stock market—they no longer produce but continue to consume, with their consumption capacity directly derived from stock wealth. This makes the stock market a demand stabilizer. If a systemic decline occurs, this part of consumption will rapidly vanish.

Thus, the Federal Reserve faces an unprecedented dilemma: maintaining the 2% inflation risk is a market crash, tolerating 3% inflation can stabilize asset prices. BCA’s clear view is: the Fed will choose the latter. This also explains why rate cuts are not necessarily bullish for tech stocks but may actually favor rotation. The real opportunity might not be headline news but in the “S&P 493” that no one is paying attention to.