Sector rotation across the US market is weighing on the S&P 500, as investors rotate out of overbought technology shares in search of new leaders. Strong corporate earnings and a seasonal edge are still supporting the index even as money flows out of US-focused funds.
Capital is being reallocated across sectors, and that rotation is stalling the S&P 500. With geopolitical concerns receding and the likelihood of a Fed rate rise diminishing, interest in artificial intelligence has held up, but technology shares now appear overbought and questions have grown about whether they can generate returns matching the capital invested.
Small caps take the lead
Investor interest in sectors sensitive to the US economy has lifted the Russell 2000 by 22% in the first half of the year, the best performance by the small-cap index since 1991. Between January and June it outperformed the Nasdaq Composite by 9 percentage points, the first time that has happened since 2006. The 'Magnificent Seven' dominated the market in 2023–2025 and chipmakers' shares early in 2026, but investors are now seeking new leaders.
The inability to identify them is driving money out. According to Bank of America, citing EPFR Global, US-focused equity funds recorded outflows of $17.2 billion, the worst since March. By contrast, Japanese funds recorded their largest inflow in seven weeks at $1.9 billion.
Earnings and seasonality support the index
The S&P 500 is underperforming the STOXX Europe 600, yet it holds a seasonal advantage: since 2014 it has never closed July in the red, averaging a 2.5% gain by month-end. Corporate results are also encouraging investors.
In the first quarter, the net profit margin of S&P 500 companies rose by 14.8%, the strongest since records began in 2009. The figure is expected to fall to 14.2% in April–June, though that would still be up 3.4% from the same period in 2025.
A bearish call from Bank of America
The caution has a prominent voice. Bank of America strategist Savita Subramanian has told investors in recent weeks to lock in gains, holding a neutral-to-negative view on equities driven by a bearish call on the megacap tech cohort. Her team keeps a target of about 7100 for the index, and she recommends large-cap value stocks in sectors such as energy and financials where dividends and buybacks have stayed healthy.
Sources: FXStreet, Barron's (snippet-based)
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