Economic rhythms can change in ways that surprise the consensus. Entering early 2026, most investors were optimistic, with stocks entering their fourth year of this bull market at all-time highs.
Of course, markets have a way of surprising the masses. Former tech leaders have exhibited a classic risk-off posture—characterized by rotation out of high-growth stocks into more defensive sectors like consumer staples and utilities.
The first two months of this year served as a stark reminder of how quickly investor sentiment can shift. Tech-heavy indices have underperformed, with the widely followed Nasdaq 100 index falling this year amid concerns about the sustainability of AI spending and broader economic softening.
Why Investors Have Rotated to Safety
The reasons behind this rotation are multifaceted but logical. Technology, after years of dominance driven by AI hype and low-rate fueled growth, entered 2026 with elevated expectations. Concerns over skyrocketing AI investment and potential regulatory scrutiny prompted profit-taking.
Broader economic signals, including a weakening jobs market and geopolitical uncertainties, encouraged investors to seek stability. Consumer staples, with their predictable demand for essentials such as food, beverages, and household products, saw buying pressure, along with defensive utilities.
This shift echoes historical patterns where, during periods of uncertainty or market broadening, capital flows from high-growth cyclicals to defensives. Staples became the go-to pocket of the market early this year, attracting record inflows as portfolios de-risked.
Yet, as we approach the March-April timeframe, historically a period of positive seasonality for equities, there’s a compelling case that this sentiment could pivot back to risk-on. Factors like substantial tax refunds injecting liquidity into consumer pockets, combined with resilient earnings and moderating inflation, suggest tech’s pause is just that—a breather before renewed momentum.
Let’s explore why this risk-off phase may give way to risk-on, starting with the current earnings landscape.
Earnings: A Solid Foundation Despite Early Volatility
The tech sector has been a key driver of aggregate earnings growth since this latest bull market began. But after years of dominance, tech companies faced headwinds in late 2025 and early 2026 as investors digested lofty valuations and questioned near-term ROI on massive AI capex.
When we take a step back, it’s clear that the underlying data paints a picture of an economy poised for reacceleration, potentially reigniting appetite for growth assets. Overall, total earnings for S&P 500 companies are tracking at about a 12.8% growth rate relative to the prior-year quarter on 8.8% higher revenues.
And the outlook for the technology sector as a whole remains unequivocally positive. We can see this in the chart below, which tracks the evolution of the aggregate 2026 earnings estimates for the sector.
Image Source: Zacks Investment Research
This data reassures me that tech’s recent underperformance stems more from sentiment and temporary rotation than fundamentals. Investors have favored defensives amid fears of slowing growth, but the latest earnings results (along with future guidance) indicate the tech sector’s fundamental story remains intact, setting the stage for a rebound.
Looking further ahead, the outlook for S&P 500 earnings in 2026 is robust, providing a key pillar for risk-on sentiment. Analysts project 12.1% annual growth, which would mark the third consecutive year of double-digit expansion – a feat not seen since the post-financial crisis recovery. Tech and communications services are expected to contribute the majority of this growth.
In my view, these estimates underplay potential upside if consumer spending strengthens. Tech’s “breather” may thus be a valuation reset, creating low-risk entry points before earnings reaccelerate.
Continue . . .
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Inflation: Moderating Pressures Ease the Path Forward
Inflation data support a constructive backdrop for risk assets. The January 2026 CPI report showed a 2.4% year-over-year increase, down from 2.7% in December 2025 and the lowest since May 2025. Core CPI (excluding food and energy) ticked down to 2.5%, the smallest gain in many years.
This cooling—faster than anticipated—provides the Federal Reserve latitude to maintain supportive policy, potentially cutting rates further if needed. Lower inflation also preserves consumer purchasing power, indirectly benefiting tech through sustained spending on devices and services. While tariffs pose upside risks, current trends suggest inflation is nearing the 2% target, alleviating one key market headwind.
Tax Refunds and Seasonality: Catalysts for Risk-On Shift
As we’ve seen many times before, post-tax season liquidity often sparks rallies. U.S. stocks could receive approximately $11 billion in weekly inflows as tax refunds are distributed through mid-April.
Tax refunds could spark a consumer-led revival. Early 2026 data shows average refunds up 10.9% to $2,290 as of mid-February, boosted by the One Big Beautiful Bill Act’s retroactive cuts. Current projections suggest $1,000 larger averages, totaling a staggering $50-$100 billion in extra liquidity, which could boost Q1 GDP by 0.5%-0.8%.
Adding to the bullish case, positive seasonality aligns with tax season. The March-April timeframe tends to be bullish, with average S&P returns of +1.13% and +1.46%, respectively, dating back to 1950.
Combined, these could reignite risk appetite, lifting tech as consumers upgrade devices and enterprises invest.
Final Thoughts
Tech’s latest pullback—driven by rotation and capex concerns—seems temporary. These transitions often reflect temporary recalibrations rather than fundamental reversals. We’ve even seen these pauses several times throughout this latest bull market, and they often precede stronger advances.
In my opinion, tech isn’t broken—it’s recalibrating for sustainable growth.
Catalysts for the upcoming move include positive earnings estimate revisions, moderating inflation, post-tax season liquidity, and enhanced seasonality. And given that we remain in a strong bull market driven by earnings growth and a resilient economy, the probability of further gains ahead remains enticing by historical standards.
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This article originally published on Zacks Investment Research (zacks.com).