Equity Market Momentum in a Soft Landing Scenario: Sector Rotation and Risk-On Sentiment in 2026

The December 2025 U.S. jobs report, released on January 9, 2026, underscored a labor market in transition. With nonfarm payrolls rising by just 50,000-a shortfall from the 73,000 forecast and below the revised November figure of 56,000-the data signaled a "no hire, no fire" equilibrium. The unemployment rate dipped to 4.4%, reflecting a modest cooling in hiring demand, while wage growth held steady at 3.8% year-over-year. These numbers, though weaker than recent years, reinforced the narrative of a "soft landing," where the economy avoids recession while moderating inflationary pressures.

Macroeconomic Outlook: Growth, Inflation, and Fed Policy

The broader macroeconomic landscape for 2026 aligns with this soft landing scenario. Professional forecasters project real GDP growth of 1.9%, with Goldman Sachs Research offering a more optimistic 2.6% estimate, citing tax cuts and easing financial conditions. Inflation, a persistent concern, is expected to trend downward. Core CPI is forecast to reach the Fed's 2% target by year-end 2026, though JPMorgan Chase cautions that mid-year spikes to 3.5% could occur due to delayed tariff pass-through effects.

The Federal Reserve's policy response will be pivotal. With labor market slack and moderating inflation, the Fed is anticipated to cut rates by 50 basis points in 2026, bringing the federal funds rate to 3-3.25%. However, the path to these cuts remains conditional on data, particularly the December jobs report, which could delay action if labor market resilience persists.

Sector Rotation: From Growth to Value

The December jobs report and broader macroeconomic signals have already triggered a strategic shift in equity market positioning. Investors are rotating out of high-valuation growth stocks-particularly in the technology sector-and into value and cyclical sectors. Financials, industrials, and defense contractors have led the S&P 500's gains in early 2026, reflecting a renewed focus on earnings durability and balance sheet strength.

This rotation is driven by several factors. First, the AI investment boom, while still a dominant theme, faces scrutiny over the sustainability of capital expenditures. Analysts warn that AI infrastructure spending must translate into tangible revenue growth to justify current valuations. Second, geopolitical dynamics, including President Trump's proposed defense spending increases, have bolstered demand for defense contractors and industrials according to market analysis. Meanwhile, healthcare and social assistance sectors continue to absorb labor market slack, adding to their appeal.

The shift is also evident in global markets. Asian and European indices have outperformed U.S. benchmarks, signaling a broader reallocation of capital toward international opportunities. This trend reflects both relative valuations and the search for yield in a low-interest-rate environment.

Risk-On Sentiment and Volatility Metrics

Investor sentiment in early 2026 remains cautiously optimistic. The AAII Investor Sentiment Survey reported 42.5% bullish sentiment as of January 7, 2026, slightly above historical averages. The VIX, or "fear gauge," closed below 15, indicating minimal immediate volatility concerns. However, analysts caution that this complacency is a double-edged sword. Low volatility implies cheap hedging costs but also leaves markets vulnerable to sharp corrections if unexpected events-such as geopolitical shocks or inflationary surprises-emerge according to market analysis.

Equity risk premiums remain compressed, reflecting confidence in the Fed's ability to manage inflation while supporting growth. Yet, the AI-driven investment cycle's reliance on debt-funded capital expenditures raises questions about margin sustainability, particularly if borrowing costs remain elevated.

Conclusion: Navigating the Soft Landing

The December 2025 jobs report and 2026 macroeconomic outlook paint a picture of a U.S. economy navigating a soft landing. While growth remains modest and inflationary pressures recede, the Federal Reserve's policy path and sector rotation dynamics will shape equity market momentum. Investors are recalibrating portfolios to prioritize value sectors, defensive cyclicals, and international opportunities, while maintaining a watchful eye on AI's long-term viability.

As the year progresses, the key risks-tariff pass-through effects, geopolitical tensions, and AI capital expenditure sustainability-will test the resilience of this soft landing narrative. For now, the market's measured optimism and strategic reallocation suggest a cautious but optimistic outlook for 2026.