The Broadening U.S. Equity Rally: How Non-Tech Sectors Are Outperforming as Tech Faces Profitability Concerns

The U.S. equity market's narrative in 2026 has shifted decisively away from the tech-centric dominance that defined earlier years. While the Information Technology sector remains a cornerstone of innovation, its valuation challenges and earnings pressures have created openings for defense, energy, and industrials to lead the broader market's expansion. This structural rotation reflects evolving macroeconomic dynamics, geopolitical risks, and the maturation of AI-driven productivity gains across non-tech industries. For investors, the shift underscores the importance of diversification and strategic sector positioning in a market increasingly defined by broadening participation.

Defense: Geopolitical Tensions Fuel a High-Valuation Boom

The defense sector has emerged as a standout performer in 2026, propelled by President Trump's proposed $1.5 trillion Pentagon budget increase and escalating global conflicts. Companies like Northrop Grumman, Lockheed Martin, and RTX have seen robust gains, driven by demand for advanced military systems and AI-enhanced logistics solutions. However, this surge has pushed defense stocks to historically high valuations, with enterprise value-to-sales (EV/S) ratios far exceeding long-term averages. While near-term momentum appears secure, analysts caution that a moderation in geopolitical tensions could trigger a correction, particularly if fiscal stimulus proves unsustainable.

Energy and Industrials: Infrastructure and AI-Driven Revival

The Energy and Industrials sectors are benefiting from a confluence of factors, including infrastructure spending, AI adoption, and the need to modernize aging systems. Energy stocks, for instance, are reacting to policy-driven demand for both traditional and renewable energy sources, with utilities poised to gain from the surging power needs of data centers. Industrials, meanwhile, are seeing a revival in capital expenditures as manufacturers and construction firms invest in AI-powered automation and supply chain optimization. Schwab's Sector Views rate both sectors as "Outperform", citing their alignment with macroeconomic tailwinds and undervalued fundamentals.

Tech's Relative Struggles: Overvaluation and Earnings Mismatches

In contrast, the Technology sector faces a credibility gap between its growth aspirations and near-term profitability. While AI development continues to drive long-term potential, many high-growth tech stocks are trading at multiples that strain traditional valuation metrics. Schwab's "Marketperform" rating for the sector highlights concerns that crowded trades in AI and cloud computing have left the industry vulnerable to profit-taking and earnings disappointments. This underperformance has created a rare opportunity for investors to rebalance portfolios toward sectors with more immediate cash-flow visibility.

Strategic Rotation: Capturing the Broadening Rally

For investors seeking to capitalize on this shift, sector rotation strategies are emphasizing value-oriented plays in defense, energy, and industrials. Financials and utilities, which also show signs of undervaluation, are being positioned as hedges against interest rate normalization and economic resilience. Equal-weight ETFs like the ALPS Equal Sector Weight ETF (EQL) offer a systematic way to overweight underperforming sectors while maintaining broad exposure. Meanwhile, Schwab's research underscores the potential of industrials and healthcare to benefit from AI adoption, suggesting a dual focus on both cyclical and defensive plays.

Risks and Considerations

While the current rotation appears well-founded, investors must remain cautious. Defense stocks' lofty valuations could reverse if geopolitical risks abate, and energy's performance remains tied to volatile commodity prices. Similarly, a rebound in tech stocks is not out of the question if earnings growth justifies their multiples-a scenario that could test the durability of the current rotation. A diversified approach, blending sector-specific ETFs with individual stock picks in high-conviction areas, offers the best balance of risk and reward.

Conclusion

The 2026 equity market is witnessing a historic broadening, with non-tech sectors reclaiming their role as engines of growth. Defense, energy, and industrials are not only outperforming but also reshaping the landscape of U.S. equities through AI-driven productivity and infrastructure-led demand. For investors, the key lies in navigating this transition with disciplined rotation strategies, leveraging undervalued sectors while hedging against the inevitable volatility of overvalued ones. As the market evolves, the ability to adapt to a post-tech-dominance era will define long-term success.