Wall Street Rotates Beyond Magnificent Seven as AI Trade Squeezes
With 2025 ending and 2026 positioning underway, strategists and traders are increasingly preparing for a market where the biggest tech winners stop doing all the lifting. Wall Street strategists are steering clients toward broader, less-loved sectors as leadership shifts from the “Magnificent Seven” style trade to more cyclical and defensive areas. The move is happening now, not “sometime next quarter,” which is why it matters.
The catalyst is a double squeeze on the AI trade: renewed skepticism about AI buildout profitability and a parallel repricing of global rate paths. Oracle’s post-earnings slide was singled out as a trigger for a wider de-risking in AI-linked names, with flows moving into materials, industrials, financials, and health care. Analysts framed it as more than a one-week head fake. That is a sharp turn from earlier in 2025, when momentum and capex narratives were enough to justify almost any multiple.
Investors are also weighing a distinctly two-sided 2026 setup. Stifel’s scenario work highlights the asymmetry: about 9% upside for the S&P 500 if the economy stays intact, but a fast 20% drawdown if recession hits. Stifel assigns a 25% chance to that recession scenario, and the bank notes the economy’s dependence on consumption, with consumer spending at 68% of GDP. Elevated valuations amplify the risk that any growth wobble turns into a rapid de-rating rather than a slow grind.
Positioning implication: treat the rotation as a risk-management upgrade, not an anti-tech manifesto. If leadership is broadening, portfolios that relied on a narrow set of mega-cap winners need new sources of earnings durability.
Global Rate-Cut Momentum Fades as Central Banks Turn Cautious
The rich world’s rate-cut narrative is stalling as the last major policy meetings of 2025 approach. After a year that began with expectations of a steady easing cycle, rate-cut momentum is fading as central banks step back to gauge whether prior easing is rekindling inflation or simply cushioning slowing growth. The “when do cuts restart” debate is quickly becoming “are we done.”
Markets are adapting in real time. Money markets are now pricing almost no further cuts from the ECB, and even embed roughly a 30% chance of an ECB hike by end-2026. In Australia, RBA Governor Michele Bullock’s signal to remain data-dependent helped push swaps to imply almost two 25 bp increases by the end of next year. The common thread is that disinflation progress is no longer enough. Policymakers want proof inflation will stay controlled as labor markets soften only gradually.
Why the hesitation now. One big reason is the uncomfortable mix of still-elevated core inflation and only modest growth. CME analysis notes that across 21 large floating-rate economies, inflation runs about 1% above targets on average, and core inflation has risen about 0.2% over the past six months. Meanwhile, unemployment is drifting higher in several places even without mass layoffs, making central banks reluctant to overtighten. Add in persistent fiscal deficits, and you have a recipe for policy staying restrictive longer than investors hoped.
Likely next steps are a 2026 defined by divergence rather than synchronized easing. CME points to U.S. rate expectations centered around 3% fed funds by end of next year, with potential tightening risk in Australia and Japan, and the possibility of a later turn higher in Europe. Reader takeaway: portfolios tied to “global cuts = easy tailwinds” should stress-test for higher-for-longer and renewed FX volatility if policy paths split.
NFL Urges Congress to Rein In Sports Prediction Markets
The NFL is escalating its pushback against sports prediction markets, arguing they are expanding faster than the guardrails meant to protect game integrity. In written testimony to Congress, the league told the House Committee on Agriculture it is “particularly troubled” that sports-related futures contracts are being offered nationwide, including in states where traditional sports betting remains illegal.
The dispute is fundamentally about jurisdiction and enforcement. Prediction markets operate under federal oversight of the Commodity Futures Trading Commission, while sportsbooks are primarily regulated state-by-state. The NFL’s Jeff Miller emphasized the mismatch: prediction markets currently operate in all 50 states, while legal sportsbooks exist in only 39 states plus Washington, D.C. The league argues that state regulators and legislatures set acceptable bet types and limits, and that those guardrails do not exist in the same way for event contracts.
The immediate catalyst is the rapid growth and the expansion of contracts beyond standard game outcomes. ESPN reported Miller cited markets that accepted trades on whether phrases such as “concussion protocol” or “roughing the passer” would be mentioned during broadcasts, which the NFL says raises integrity concerns. The league also warned prediction-market volumes could become larger than sportsbook wagering, amplifying incentives for manipulation.
Industry players are pushing back. A prediction markets coalition told ESPN the analogy is closer to regulated financial markets than gambling and argued CFTC anti-manipulation rules already apply. Meanwhile, the commercial stakes are rising: traditional sportsbook operators, including some that partner with the NFL ecosystem, have signaled interest in launching prediction markets. The next step is likely more formal CFTC and congressional scrutiny, plus continued state-level legal battles. If you operate in media, sports, or fintech, assume compliance rules, permitted contract types, and distribution could change quickly in 2026.
Rate-Path Repricing, Sector Rotation, and New Regulation Watchpoints
- Rate-path repricing: swaps moving toward fewer cuts or even hikes. Watch whether that trend spreads beyond Europe and Australia.
- Rotation durability: sector flows into industrials, financials, health care, and materials. A second week of follow-through would be telling.
- Recession hedge signals: 20% drawdown scenario framing. Track defensives outperforming on flat economic data.
- Consumer trade-down: appetizer orders up 20% year over year. Watch if “food away from home” inflation stays above 3%.
- Prediction market regulation: Congressional/CFTC oversight could tighten allowed contract types and platforms’ state access.
