Weekly Winzer: Sector rotation

In a global context, equity markets have been posting gains since the beginning of the year. However, that is only half the story: beneath the surface, a significant sector rotation is taking place – away from previously well-performing shares such as large US technology companies and towards sectors and investment styles that have received less attention to date.

At the same time, the largest and most important cryptocurrency, Bitcoin, has incurred massive losses. Other alternative forms of investment such as gold and silver are still in positive territory but have also recorded sharp declines in recent days. This raises the question of whether these are just random movements – the famous “noise” – or whether these developments provide a cue for future trends.

Inflationary growth

First things first: the economic data confirm that we are in a favourable phase of the economic cycle for equities. We could describe this as inflationary growth. In such an environment, the economy grows at or even above its long-term potential, while inflation is at or above the central bank’s target of around 2%. This environment is generally positive for equities, especially for so-called value shares – i.e. shares with comparatively low price-earnings (P/E) ratios. Commodities also benefit from this.

Good economic indicators

The global Purchasing Managers’ Index (PMI) rose from 52 in December to 52.5 in January. As an early indicator, the PMI is based on surveys of purchasing managers and shows whether economic activity is increasing, stagnating, or declining. As the PMI is available sooner than many official statistics, it provides early indications of economic developments on a global scale. The aggregated January figure points to solid growth in the global economy in the first quarter, projected at around 2.5% (annualised).

In terms of “hard” data, US consumption continues to show decent growth. Although retail sales in December were somewhat disappointing at −0.1% month-on-month, the fourth quarter of 2025 saw annualised quarterly growth of 2.6%. The estimate for private consumption growth (goods and services) is 2.5%, again annualised.

Slight increase in inflation

The latest inflation reports point to a slight increase in the inflation rate of about 2.6% year-on-year in developed economies. On Friday, US consumer prices for January will be published. The core rate (excluding the volatile components of food and energy) is expected to have declined slightly from 2.6% to 2.5%. In the monthly figures, upward risks could emerge: forecasts are at +0.3%, which translates to about 3.6% on an annualised basis. It therefore remains to be seen whether inflation in the United States will be moving closer to 2% or 3%.

In the Eurozone, the flash estimate for January showed a decline in core inflation from 2.3% to 2.2%. At 1.7%, overall inflation has even fallen below the 2% mark. In both regions, price dynamics in the service sector remain above those of the goods sector. A further decline in service inflation would require a slowdown in wage growth (or an increase in productivity). In the USA, the labour cost index suggested as much: wages and salaries in the private sector rose by 3.3% year-on-year in the fourth quarter, following 3.5% in the previous quarter.

Stagnating US employment

Traditionally, financial markets pay particular attention to US labour market data, as employment growth usually allows for conclusions about economic growth, and the unemployment rate provides an indication of the position in the economic cycle. The data for January will be published next Wednesday. Employment growth is expected to remain low, with the unemployment rate remaining steady at 4.4%. This is also indicated by private ADP data. What is striking is that employment has been stagnating for months, while economic growth has been strong. This combination is unusual and unlikely to last.

This setting results in three scenarios for 2026:

1. Economic growth is adjusting downwards in line with weaker employment growth.
2. Employment growth is gaining momentum and catching up with economic momentum.
3. Productivity is rising significantly, not the least on the back of AI. This, while less likely, is now a more common explanation.

Sector rotation

This brings us to the key point. Since October 2025, there has been a pronounced rotation from growth shares to value shares, which has recently intensified by a significant degree. For example, the Russell 1000 Value index has increased by about 10.7%, while the Russell 1000 Growth index has fallen by 2.0%.

👉 Value shares are characterised by low P/E ratios and typically include financials, energy, industrials, and commodities.

👉 Growth shares are more based on future earnings, invest heavily in expansion and innovation, and come with higher valuations. Typical sectors are technology, e-commerce, biotech, AI, cloud, and software.

Whether this trend is sustainable remains to be seen and is the subject of further research. Historically, value shares have tended to outperform growth shares globally from the 1970s until the financial crisis of 2007/2008 – with one important exception: growth shares dominated in the second half of the 1990s during the dot-com bubble. Since 2007, however, growth shares have clearly outperformed value shares.

The currently most important driver of rotation is a combination of concerns about the high valuations of many technology shares and the expectation that artificial intelligence will indeed have a disruptive effect. Market leadership is shifting away from AI producers to those companies that will ultimately benefit from the productivity gains promised by AI. One possible investor strategy is therefore: “Buy what AI enables – sell what AI makes redundant.” The price corrections for gold, silver, and Bitcoin can be explained in part by profit-taking – not only for technology shares, but also for assets in general that have seen particularly strong, sometimes parabolic price increases.

 

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