Market Rotation: Transports (IYT) and Small Caps (IWM) Outperform Tech Stocks

This analysis is based on the Seeking Alpha article [1] published on December 8, 2025, which highlighted the outperformance of the iShares Transportation Average ETF (IYT) and iShares Russell 2000 ETF (IWM) relative to tech stocks. Over the previous month, IYT gained 5.4% and IWM 4.4% [1], reflecting a notable market rotation from technology stocks that dominated 2025’s gains. Internal performance data (November 10 to December 5, 2025) supports this trend, with IYT up 4.62%, IWM up 2.35%, and the tech-heavy Invesco QQQ Trust (QQQ) up only 1.06% [0].

Key drivers identified by Bloomberg [2] include:

1. Tech rally fatigue
   : Concerns over the sustainability of AI-fueled gains have led to stalling momentum for tech heavyweights like NVIDIA (NVDA) and Microsoft (MSFT).
2. 2026 economic optimism
   : Expectations of accelerated U.S. economic growth in the first half of 2026, driven by potential tax policy changes and the World Cup’s economic impact, have increased demand for cyclically sensitive sectors (e.g., transportation) and small caps.
3. Style rotation
   : November 2025 saw value stocks outperform growth, and the S&P 500 Equal Weighted Index (1.7% gain) outperform its cap-weighted counterpart (0.3% gain), indicating broader market participation [2]. Sectors like health care (+9.1%) and materials led gains, while tech declined 4.4% [2].

1. Shift from tech concentration
   : This rotation breaks the 2025 trend of market gains being driven almost exclusively by a small group of tech megacaps, suggesting growing confidence in the broader economy.
2. Catalysts for cyclicals
   : The combination of potential policy stimulus (tax changes) and a major global event (World Cup) is uniquely driving interest in economically sensitive sectors.
3. Broader market participation
   : The outperformance of the S&P 500 Equal Weight Index indicates reduced concentration risk, a positive sign for market stability [2].

• Risks
  :
  • A prolonged tech sell-off could drag down broader indices due to tech’s large weighting in major benchmarks.
  • If 2026 economic growth fails to meet expectations, cyclical sectors like transportation and small caps may reverse gains.
  • Fed rate policy uncertainty (fewer rate cuts than anticipated) could pressure rate-sensitive small caps [2].
• Opportunities
  :
  • Continued economic optimism may sustain gains in value and cyclical sectors.
  • The rotation presents a potential diversification opportunity for investors previously concentrated in tech [2].

• The iShares Transportation Average ETF (IYT) and iShares Russell 2000 ETF (IWM) outperformed tech stocks over the prior month, with gains of 5.4% and 4.4% respectively [1].
• The rotation is driven by tech rally fatigue, optimism about 2026 U.S. economic growth, and style rotation trends [2].
• Critical factors to monitor include 2026 GDP and employment data, Federal Reserve rate decisions, and the outcome of proposed tax policy changes [2].