Wall Street bulls are going into 2026 stuffing their portfolios with stocks, dropping cash holdings to a record-low 3.3%, and pushing into commodities at levels not seen since early 2022, according to Bloomberg.
Positioning in equities is climbing fast, and the belief that more growth is coming is outweighing the usual alarm bells. Even with S&P 500 valuations hitting new highs, beyond the peaks of 2000 and 2022, fund managers aren’t flinching. They’ve accepted that this market is expensive, and they’re staying in. But they’re also gambling that companies will deliver blowout earnings to back it all up.
Investors ignore rate worries as job market stumbles
Despite the risks piling up, bulls are still confident. Even as US job data shows signs of weakening, and the market only expects two Fed cuts next year, optimism hasn’t gone anywhere. The growth story is holding the market up. But that story is now standing on thin ice.
Citigroup’s Scott Chronert warned that entering year four of the current rally comes with baggage. “Ongoing bouts of volatility should be expected and may be more acute given implicit growth expectations,” he said. “A high valuation starting point is a hurdle for the market, but not an insurmountable one.”
Scott added that fundamentals now need to prove themselves, so the margin for error is gone.
The same goes for AI-related capex, because the tech sector, especially hyperscalers, has been throwing billions into AI infrastructure, pushing spending to dangerous levels. This is stressing out balance sheets.
And bond traders are watching closely. When Oracle’s stock collapsed after weak earnings, its credit default swaps spiked to record highs. That was all it took to flash a warning across the entire market.
Meanwhile, earnings expectations for 2026 are sky-high. The bar is set for double-digit growth across all regions. But that’ll only hold if a long list of things go right. Asia needs to deliver economic growth.
Europe must channel fiscal spending straight into corporate profits. And in the US, everything hangs on AI momentum and a still-functioning labor market.
Stock rotation heats up as AI and semis cool off
Two straight months of rotation show that people are stepping away from AI and semiconductor plays, looking instead at more traditional sectors. Both US and European markets are showing this trend, though it’s unfolding differently depending on the region.
This is a search for value in lagging sectors, a bet on defensives and economic exposure, which is likely to intensify in upcoming earnings seasons.
With concentration risk from 2025 still fresh, traders are now leaning into stock-picking. Correlations between index members have collapsed, giving discretionary fund managers a rare chance to outperform.
BlackRock’s Jean Boivin said the firm still believes in the AI theme as the main driver for US equities, but he added that the environment now favors “picking winners and losers from among the builders now and later as AI gains start to spread.”
Seasonality is also coming into play. The start of a new year typically lifts risk appetite, thanks to fresh inflows, reset performance targets, and new risk budgets. But it’s not a guaranteed ride up. January and February tend to be mixed, with past years showing both sharp gains and major pullbacks. Everyone is eyeing Q1, but expectations might be getting too high.
The final risk being tracked by major firms is clear: the labor market. If employment weakens further, the whole growth outlook collapses. Goldman Sachs’ Kamakshya Trivedi believes that while recession chances remain low for now, the AI trade remains the biggest threat to US stocks.
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