Tech stocks have driven a disproportionate share of the market’s gains in recent years. Now, it’s time for them to share the limelight, says Joe Quinlan, the chief market strategist at Bank of America.
“There’s plenty of places to put money to work better other than, say, Mag 7,” he said, referencing the largest stocks in the S&P 500 by market capitalization.
Specifically, cyclical stocks should start to look attractive next year, Quinlan said, calling the theme his highest-conviction investing idea right now, and recommending a barbell approach between tech and cyclical shares.
Cyclical stocks are those that rebound when the economy is recovering from a downturn or is expanding. Quinlan highlighted sectors like industrials, materials, and financials as places to look for opportunities.
Cyclicals may seem like a curious recommendation at the moment. The labor market appears to be softening, with rising layoffs and weaker job growth fueling concerns about a consumer-led slowdown. But Quinlan said that the job market is just learning to adjust to the new environment, not entering a downward spiral.
“The labor market is weakening in some parts, but it’s strengthening in others, so it’s really a mixed bag,” he said. “But the key is, companies are learning to live with the technology that comes with artificial intelligence, they’re learning immigration constraints. It’s just going to make us more productive, say, 18-24 months out.”
Quinlan pointed out several drivers that should propel economic growth in 2026 and boost cyclical stocks.
“It’s continued consumer spending, particularly among higher income households; capital investment not just in data centers but also refurbishing, building out more factory capacity; a weaker dollar helps our exports; global growth is picking up, so that’s good for multinational earnings,” he said.
“And then you’ve got the fiscal and monetary stimulus: fiscally you’re going to see a lot more money dropped in bottom lines because of the One Big Beautiful Bill Act,” Quinlan continued, adding that he sees two Federal Reserve interest rate cuts coming in 2026, starting mid-year, in addition to the cut that is widely expected in December. Rate cuts stimulate economic activity by encouraging borrowing and spending.
Strategists at JPMorgan and HSBC have also said cyclical stocks are one of their preferred areas of the market to invest in next year amid robust projections for economic growth.
Year-to-date, the industrials, materials, and financials sectors have returned 17.4%, 4.5%, and 10.8%, respectively. The S&P 500, by comparison, has risen 16.4% in 2025.
So far in 2025, cyclicals have outperformed defensive stocks, which get a boost from economic uncertainty, around the world. That recent rally has US cyclical stocks trading at a valuation premium relative to defensive stocks, as the below chart from Goldman Sachs shows.
Goldman Sachs
Examples of funds that offer exposure to cyclical stocks, particularly in Quinlan’s preferred sectors, include the iShares U.S. Industrials ETF (IYJ), the State Street Materials Select Sector SPDR ETF (XLB), and the Vanguard Financials ETF (VFH).
