Value stocks rally as Dow tops 48,000 for first time. What does it mean for 2026?

By Joseph Adinolfi and Joy Wiltermuth

Investors are rotating away from the stock market's biggest winners - and into its biggest losers

U.S. stocks are in the midst of another rotation.

After years of trailing their hard-charging rivals in the information-technology sector, stocks from the so-called old economy are enjoying a moment of bliss.

On Wednesday, the Dow Jones Industrial Average DJIA finished above 48,000 for the first time ever after tallying a second-straight record close, Dow Jones Market Data showed. Investors, excited about the prospect that the longest-ever U.S. government shutdown could soon come to an end, likely helped push the blue-chip gauge higher, said Sam Klar, portfolio manager of the GMO Domestic Resilience ETF.

"The main theme is: Value is back," said Jamie Cox, managing partner at Harris Financial Group - pointing to healthcare stocks XX:SP500.35 "perking up quite a bit," as well as strong performance by industrials XX:SP500.20.

While the Dow flourished, the tech-heavy Nasdaq Composite COMP fell again Wednesday. The Dow has beaten the Nasdaq by 2.38 percentage points over the past two trading days, its strongest two-day outperformance since Feb. 25, Dow Jones Market Data showed.

The shift in favor of the Dow comes on the heels of a broader rotation in markets that has played out over the past few weeks. Highflying momentum stocks like Oklo Inc. (OKLO) and Palantir Technologies Inc. (PLTR) have stumbled, while value stocks have powered higher.

Doubts about the sustainability of the artificial-intelligence trade have been partly behind the shift, investors noted.

Since the start of November, sectors that had lagged behind earlier in the year - most notably, healthcare - have suddenly found themselves at the front of the pack. For the first time in months, there appears to be life outside of the AI trade.

"Earlier this year, it seemed like nothing could go wrong for these [AI] stocks - they just kept going up and up and up," Klar at GMO told MarketWatch during an interview.

"Now, the market is trying to figure out in real time, 'OK, we think the fundamentals of AI are good, but how good?' That is a delicate position to be in, and that creates natural uncertainty," he added.

Another factor could simply be investors booking gains on winning trades, especially with several highflying tech names still up dramatically since the April tariff shock. "It's responsible to take profits," Cox at Harris Financial said. "It's a responsible reallocation of capital."

Play it safe through year-end?

The House of Representatives is expected to vote Wednesday evening on a funding bill that would clear the way for the federal government to reopen as soon as Thursday. The Senate passed a version of the legislation on Monday. Once it clears the House, the bill would need to be signed by President Trump for the government to officially reopen.

Historically, government shutdowns typically have little impact on stock-market performance. Adam Turnquist, chief technical strategist at LPL Financial, pointed out that the S&P 500 index SPX has held up better this time around than during previous episodes, although the varying lengths of each shutdown makes a direct comparison difficult.

After a shutdown ends, stocks tend to see strong returns in the months that follow, Turnquist noted. But recent developments have cast doubt on the durability of the AI trade, which has powered much of the gains for U.S. stocks since the start of the three-year bull market.

Since this latest shutdown began, the S&P 500 has gotten off to its worst start for the month of November in years. Typically, November and December are the months where U.S. stocks see their strongest returns.

Some are wondering whether this could be the start of a more pronounced shift away from AI leadership. If this were to happen, it would probably continue to weigh on the S&P 500 and Nasdaq, given the heavy weighting that the largest Big Tech companies have in each of those indexes. It would take strong performance by the rest of the market to make up for any losses in tech stocks.

Klar pointed out that growth stocks, like those in the tech sector, have led the way over the past few years, so the burden will be on value stocks to prove that they can steal some of the momentum for themselves.

"There have been a lot of head fakes along the way," Klar said. The summer of 2024 also saw a "great rotation" in favor of small-cap stocks and value names that ultimately proved short-lived.

For now, Bob Savage, head of markets macro strategy at BNY, cautioned against reading too much into the near-term shift in leadership.

While investors have expressed doubts over the past few weeks about the sustainability of AI-related capital expenditures, Savage doesn't believe pension funds, foreign investors and other types of investors have seen enough to inspire them to materially shift their allocation away from the technology sector.

Instead, he noted that this shift in leadership has the flavor of risk-focused portfolio managers taking profits at the end of what has been another strong year for stocks. The end of the shutdown means investors will soon confront other issues and questions, including doubts about the strength of the U.S. labor market and the American consumer.

A big enough shift away from tech stocks - which have seen their weighting in the S&P 500 surge over the past three years to the highest level for the sector on record - would likely create problems for the broader market, Savage said. Whether this is a rotation or the start of a deeper correction remains to be seen, he added - but so far, it is looking more like a rotation.

Whether the Federal Reserve delivers another interest-rate cut at its final meeting of the year in December will be another critical question. The Wall Street Journal reported late Tuesday that senior Fed officials are divided about the need for another rate cut next month.

"This rotation is all about, 'Get me through to the end of the year so I don't blow up on valuation,'" Savage said.

"But the first quarter of 2026 is going to be determined by what happens in December," he said. "Show me the data, show me another Fed cut, show me growth, and I'll tell you what I'm going to do in 2026."

-Joseph Adinolfi -Joy Wiltermuth

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(END) Dow Jones Newswires

11-12-25 1715ET