Spinning Wheel: What Goes Up…

Notwithstanding that the major U.S. equity indexes are sitting on healthy double-digit gains heading into the final two months of 2026, the calm at the index level belies a lot of churn and rotation underneath.

Average index members have suffered drawdowns two to nearly four times larger than their parent indexes, stock level correlations are at or near their lowest readings in more than a decade, and sector leadership has been flipping month to month. At the same time, earnings and forward estimates have been moving up rather than down, which is not the norm.

In short, this has been a market of stocks rather than a stock market. Let's walk through the data on drawdowns, breadth, correlations, rotations, earnings revisions, and economic growth, and what it all might mean for investors.

The gap between index and member drawdowns is a tell. The capitalization-weighted indexes have been held aloft by whichever group or sector has been leading at the time, while a large share of individual stocks have gone through what has amounted to their own bear markets. Index-level returns tell very little about the experience of the typical stock, or of an investor who owns a concentrated handful of them.

For context, correlations tend to spike during periods of macro stress, when everything gets sold at once. That happened in the 2011 debt ceiling and eurozone crisis episode (when correlations were above 0.9), the 2020 pandemic crash (above 0.8), the 2022 inflation spike/bear market (near 0.6), and, to a lesser degree, the spring 2025 tariff shock (near 0.5). Each spike was followed by a long grind lower.

The trend since 2023 has been decidedly downward, with readings mostly below 0.2 and now near the lows. Low correlation is a double-edged sword. It arguably reflects a market not gripped by fear and one that rewards security selection. But it also means diversification across a few big names is not doing the work investors might assume based on history. It's also suggestive of a backdrop where index stability can coexist with sharp swings in individual stocks.

Another example of this phenomenon is the fact that a record share of the S&P 500 has been trading with a negative six-month beta, meaning the stocks have been moving in the opposite direction of the index on a weekly basis.

What stands out about 2026 is the amplitude of the swings. The measure fell to about 15% in the spring, jumped to roughly 67% in the summer, collapsed back below 20% in early fall, and has now spiked again. These whipsaws are the breadth equivalent of the low-correlation backdrop: leadership is rotating rapidly rather than settling into a durable trend.

Looking back over the past year, the monthly sector quilt shows how little persistence there has been in leadership. Energy was the top sector in five of the past 12 months, but it was dead last in April and May, and near the bottom in June. Communication Services led in April, but finished last in both June and October. Tech has bounced between the top and bottom of the rankings all year.

The Health Care sector has now leapfrogged Tech to move into the second spot, so history may be less of a guide. However, historically, the year's two leading sectors tended to move together, with an average correlation of about 0.65, as they are usually riding similar macro waves. This year, Energy and Tech have effectively been taking turns, which shows that leadership has not come from a single theme (and that goes for Health Care, too). It is a meaningful departure from the narrow, momentum-driven leadership of recent years.

For our ratings on all 11 S&P 500 sectors, see the latest Schwab Sector Views.

The largest upgrades have been to the Energy, Industrials, and Financials sectors, while the largest downgrades have been to Communication Services, Materials, and Health Care. The Communication Services' cut lines up with that sector's October drubbing in price. Technology is a more interesting case: estimates were raised by 10 points even as the sector fell nearly 7% in October, suggesting at least part of the recent weakness is about positioning and valuation rather than fundamentals.

For calendar year 2026, estimated S&P 500 earnings growth has jumped to 36% from less than 27% on July 1, an upward revision of nearly 10 points in four months. Ten of 11 sectors saw estimates rise or hold steady.

Energy again leads the full-year growth expectation, followed by Communication Services and Consumer Discretionary. Health Care is the lone sector with a cut. Two disconnects are worth flagging. Communication Services' full-year estimates are up 24 points, yet third-quarter estimates were slashed by 33 percentage points, and the sector is down more than 7% over the past year. The full-year number appears to be leaning on results outside the third quarter, while the market appears skeptical of its durability. Health Care has the weakest expected 2026 earnings growth of the 11 sectors, yet it is the second-best performer over the past year—the gain likely coming from multiple expansion and defensive (risk-off) demand.

As such, the current cycle is being distorted by the fact that the artificial intelligence (AI)-driven tech boom—unlike the tech boom in the late 1990s—is overwhelmingly dependent on imports. To be sure, net export activity pulled down growth for much of the internet boom in the 1990s (as is the case today), but the current pace of imports is on a scale we've rarely seen in history. As shown in the chart below, net exports subtracted 3.32 percentage points from GDP in the third quarter. Excluding the Liberation Day swings, one has to go back to the 1940s (nearly the start of GDP data) to see a similar magnitude.

This underscores an important reminder when it comes to the math of the AI boom. The United States' position as a net importer—especially in the information technology category—has not changed. If anything, dependence on foreigners has increased, evidenced by the fact that semiconductor imports are up by 185% year over year through August, according to the U.S. Census Bureau. We are on record for calling today's stock market a "duck" this year, which looks calm on the surface but is quite chaotic underneath. Perhaps the same can be said of the economy, thanks to the distortions coming from AI's outsized influence on business investment, as well as its import bias.