Danny Moses on the 'Big Short' Rotation: Why the Real Risk Isn't a Crash

The primary market risk for 2026, according to Danny Moses, is not a sudden, systemic crash. It is a structural, disruptive rotation. This is the heart of his "Big Short" perspective: the real blind spot is not an obvious crisis, but a gradual, painful reallocation of capital that will reshape the market's very foundation. The setup is one of uneasy balance, where the market is neither euphoric nor cheap, leaving little room for error when that rotation finally accelerates.

The pivot is a clear move away from the extreme concentration that defined the AI-driven frenzy. For years, a handful of mega-cap technology titans dictated market direction, creating a top-heavy, fragile environment. That era is giving way to a "Great Rotation," a shift that Moses frames as healthy over the long term but disruptive in the near term. The evidence is already visible in the market's first week of the new year. While major indexes held near record highs, the leadership was telling. The S&P 500's advance was driven by financials and industrials, while the Nasdaq lagged. This divergence signals pressure on mega-cap growth and a tilt toward value, cash flow, and balance sheet resilience.

This rotation would be a period of "dislocation and indigestion," Moses warns. Given how heavily major indices are weighted toward that small group of tech stocks, even a partial shift could cause significant near-term turbulence. The market's new equilibrium will favor breadth and resilience over concentration, but the path there is fraught with the risk of a sharp, disorderly correction if the rotation is triggered by a shock. The real danger, then, is not a crash from below, but a crash in the narrative of perpetual, concentrated growth.

The Mechanics: Valuation, Policy, and the AI Inflection

The rotation Moses anticipates is being driven by three converging forces: a shift in valuations, a recalibration of trade policy, and the maturation of the AI investment cycle itself. Together, they are creating a structural environment where the old growth narrative is losing its grip.

First, the valuation support for concentrated tech has eroded. The market is no longer priced for perfection, but it also offers little margin for error. This precarious balance removes a key pillar of the previous rally. As Moses notes, the setup leaves investors vulnerable to a rotation out of growth, particularly technology, and into more value-oriented sectors. The weight of mega-cap stocks in major indices means even a modest shift in sentiment could trigger significant dislocation. The pressure is mounting on the very names that have carried the market, making their continued outperformance less certain.

Second, U.S. trade policy is actively reshaping the economic landscape. The dramatic narrowing of the trade deficit-from a peak of $136 billion in March to just $29.4 billion in October-signals a powerful "carrot and stick" environment. Tariffs are curbing imports while exports are rising, a dynamic that is boosting domestic industrial and consumer sectors. This policy tailwind is a tangible, near-term force that is already altering the competitive calculus. It provides a direct counter-narrative to the globalized, tech-driven growth story, favoring companies with strong domestic exposure and manufacturing capacity.

Finally, the AI investment cycle is entering a new, more capital-intensive phase. The projected explosion in hyperscaler capital expenditure-~$602 billion in 2026, up 36% year-over-year-marks a critical inflection. This isn't just about software; it's about building the physical infrastructure to power it. The economics are shifting from pure software margins to massive, long-term capex cycles. This maturation brings its own risks. As Moses warns, questions about the sustainability of extreme gross margins and the availability of power to meet demand will soon matter more than the promise of AI. The focus is moving from innovation to execution and financing, a transition that favors companies with robust balance sheets and operational discipline over those priced for perpetual growth.

These three forces-eroding valuation buffers, active policy support for domestic industries, and the capital-intensive maturation of AI-are the mechanics accelerating the Great Rotation. They are creating a market where the old rules no longer apply, and the path to a new equilibrium will be defined by this painful, necessary reallocation of capital.

Financial Impact and Sector Implications

The macro shift from concentrated growth to a broader, value-oriented market is not a theoretical exercise; it is a direct force reshaping financial dynamics across sectors. The rotation favors companies with durable cash flows and balance sheet resilience, while punishing long-duration assets priced for perfection. This creates a clear dichotomy in the new market equilibrium.

The winners are sectors built for stability and tangible earnings. Consumer Staples and Energy, with their pricing power and steady cash generation, are the archetypal beneficiaries of this rotation. Their business models are less sensitive to the volatile growth narratives that have dominated. In contrast, the losers are the long-duration growth assets that have carried the market for years. Their valuations, which have long been supported by a low discount rate and boundless future promise, are now exposed. As Moses notes, the market's uneasy balance means even a modest shock could trigger a rotation out of these names, making their continued outperformance a key risk.

For the S&P 500, the financial implication is stark. The index's fate is inextricably linked to the performance of its most heavily weighted mega-cap tech stocks. To avoid the "dislocation and indigestion" that a rotation would cause, the index must see continued earnings growth and margin expansion from these dominant names. This is the critical buffer. If their growth stalls or margins compress, the weight of their underperformance could drag the entire index lower, regardless of broader economic health. The market's new equilibrium will be fragile until this earnings engine can be sustained or broadened.

This selective environment also defines the credit landscape, which Moses identifies as the new "blind spot." Capital is no longer indiscriminate. As the evidence shows, the credit market is entering 2026 with greater dispersion and a return to fundamental underwriting. While default rates have eased and balance sheets are generally healthier, the focus has shifted from broad market beta to granular credit selection. This benefits companies with durable business models across all sectors, but it also means stress can ripple quickly through less resilient borrowers. The recent wave of bankruptcies is a reminder that a massive amount of optimism, particularly around AI, is predicated on access to debt. If that access tightens or the economics of growth slow, the impact will reverberate well beyond the tech sector, hitting leveraged borrowers and complex private credit structures first. The real risk is not a crash from below, but a slow bleed in credit quality as the rotation exposes the weakest links.

Catalysts, Scenarios, and What to Watch

The forward path hinges on a few critical catalysts and risks. The primary driver for the market's stability-and the success of the Great Rotation-is the path of earnings growth in 2026. Goldman Sachs Research forecasts a 12% increase in earnings per share (EPS) for the S&P 500 this year. This growth must be broad-based, not just concentrated in the mega-cap tech leaders. If it is, it provides the fundamental base for a continued bull market, as strategists note. But if earnings disappoint, the market's high valuations-trading at a forward P/E of 22x-leave little room for error and could easily trigger the very rotation out of growth that Moses warns about.

The key risk is that this becomes a "disruptive rotation." The evidence already shows the tilt away from growth, with the S&P 500's advance in early January driven by financials, industrials, and defensive cyclicals, while the Nasdaq lagged. If this shift accelerates, it could cause significant near-term volatility and "dislocation and indigestion," especially given how heavily major indices are weighted toward that small group of tech stocks. The rotation would be healthy over the long term, but its pace and manner will determine whether it's orderly or disorderly.

Investors must also watch for whether this rotation into value is broad-based or merely a tactical shift. The recent improvement in market breadth, with the S&P 500 Equal Weight Index narrowing its gap with the market-cap-weighted index, suggests a more resilient foundation is forming. However, if the rotation is shallow and driven only by a temporary rotation of capital, it could reverse quickly if growth earnings regain momentum. The setup is fragile; the market is in an "uneasy balance," and a modest shock could spark a correction or a reversal of the rotation.

Finally, the AI story itself presents a looming risk to the new equilibrium. While AI is a genuine secular growth story, the economics are coming into focus. As Moses notes, there will be a period when the sustainability of extreme gross margins and the availability of power to meet demand matter more than the promise. The projected explosion in hyperscaler capital expenditure-~$602 billion in 2026-marks a shift from pure software to massive, long-term capex. If this maturation leads to slower-than-expected productivity gains or hits physical constraints, the impact will reverberate well beyond tech, hitting leveraged borrowers and complex private credit structures first. The real blind spot, as before, is credit.