Global equity markets were mostly steady in a holiday-shortened week. In Europe, the Euro Stoxx 50 and the UK FTSE 100 both hit record highs. The S&P 500 was on track to finish the week slightly higher.
HSBC Asset Management said sector rotation is still underway. Money is moving out of expensive technology shares and into more cyclical areas such as Industrials and Materials. The update also noted mixed signals across sectors, with parts of the market behaving as if they are in different stages of the economic cycle.
Sector Performance So Far In 2026
So far in 2026, Energy is up 19% and Materials are up 16%, with Industrials also performing well. Defensive sectors have risen too, with Consumer Staples up 11% and Utilities up 9%.
Small-cap stocks are up 9% year to date. The article highlights that cyclical strength, defensive gains, and rising small caps are happening at the same time.
With the broader market calm, the main story is the rotation between sectors. We are seeing strength in cyclical areas like Energy and in defensive areas like Consumer Staples. This suggests the market does not have a clear view of where the economic cycle is headed.
The latest CPI reading was 3.2%, slightly above forecasts. This supports the idea that inflation is still sticky, as seen in late 2025. That helps explain the move into Materials, which can act as an inflation hedge. At the same time, January’s job report was solid at 210,000. However, the manufacturing PMI fell to 49.8, just below the level that signals expansion, which helps explain some of the defensive positioning.
Positioning For Rotation
In this environment, a classic pairs trade may make sense in the coming weeks. Consider going long futures or call options on industrial or materials ETFs. At the same time, consider shorting the expensive technology sector or buying puts on it to hedge and to benefit from the rotation.
The VIX, which tracks S&P 500 volatility, has stayed low around 14. But that can hide the choppiness under the surface. This suggests broad market protection may be less efficient. Instead, options tied to individual sectors may do a better job capturing the sharper moves within the market.
From a 2026 viewpoint, this feels similar to the slowdown fears we saw in mid-2025. It also resembles the sharper rotation out of high-multiple tech in 2022, when the Fed started tightening. The key lesson is that rotations like this can last longer than many expect.
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