The equal-weight S&P 500 has been rising to record highs since the beginning of the year, while the market-weight S&P 500 has been literally loopy just below 7000 over the same period (chart). This has been mostly attributable to the stock market's rotation in the type of outperforming stocks, from high-tech to low-tech industries. Previously, the former were supercharged by expectations that companies involved in AI were sure winners, while the latter lagged because investors figured it would take a while before AI benefited them. However, once the hyperscalers began massively increasing their spending on AI infrastructure, investors feared that the investments might not pay off. This mounting uncertainty triggered a rotation from high-tech industries that had gained much market-cap share in the S&P 500 to low-tech industries with much smaller market-cap share.
So far this year, investors have favored the S&P 500 sectors that are associated mostly with the physical and analog world rather than the virtual and digital world (chart). That makes a lot of sense because much of the AI capital spending boom will boost demand for oil and gas, electricity, materials, capital equipment, and real estate.
Furthermore, the geopolitical backdrop remains unsettled and unsettling. A military confrontation between the US and Iran seems increasingly likely, which has sent the price of a barrel of Brent crude oil up by more than $10 since the start of the year. This explains why the S&P 500 Energy sector has been the best-performing S&P 500 sector so far this year (chart). Yet the transportation stocks included in the S&P 500 Industrials sector have continued to rise to record highs. Defense stocks, which are also part of the Industrials sector, have been very strong so far this year. Rising geopolitical risks and uncertainties have been bullish for precious metals, which are included in the Materials sector. Base metal prices are rising amid growing demand driven by booming AI capital spending.
The stock market's sector rotation has been largely driven by the repricing of sector valuation multiples. So far this year, the forward P/Es of the following sectors have declined, mostly due to AI-related uncertainties: Consumer Discretionary, Information Technology, Communication Services, and Financials (chart). Investors rebalanced into the other seven sectors, which saw their forward P/Es rise so far this year. As a result, the equal-weight S&P 500 outperformed the market-weight index.
Also outperforming the market-weight S&P 500 have been the SmallCap and MidCap stock price indexes (chart).
While investors have been rebalancing their portfolios, resulting in the repricing of S&P 500 sectors, industry analysts have remained mostly bullish on the earnings outlooks for the companies they follow. Many of them weren't bullish enough about earnings during the four quarters of 2025, which all had significant upside "earnings hooks" in the charted results, as actual results were stronger than projected ones (chart).
The forward earnings per share of the S&P 500 rose to yet another record high during the week of February 19 (chart). The 2026 consensus estimate held steady at $314.62, while the 2027 estimate rose to $364.54. Both are higher than our current estimates of $310 and $350. We are likely to raise our estimates soon once the final tally for 2025 is in.
Meanwhile, the breadth of positive 12-month forward revenues and forward earnings percent changes continues to increase (chart). This is a very good reflection of the current strength of US economic activity.
We asked our friend Michael Brush for an update on the pace of insider buying: "Insiders continue to make quick lightning strikes into the market and individual names on sharp weakness. But otherwise, they are quite cautious. Meanwhile, sentiment remains very bullish. It is in the danger zone, in the contrarian sense. The Investors Intelligence Bull/Bear ratio recently came in at 3.87. Anything above 4.00 is the danger zone, and we are close enough. This combination of cautious insiders and enthusiastic investors makes the market vulnerable to downside risk. It also suggests the market will not go into runaway upside mode anytime soon." (Michael covers insider activity in his investment letter, Brush Up on Stocks, uponstocks.com.)
We agree.
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