Momentum pullback drives market rotation, creating value opportunities within growth sectors

Overview

The report reviews structural changes in global equity markets since 2025: the long-standing post-financial-crisis advantages of the U.S. market, technology sector, and growth style are weakening, while return opportunities are spreading across more regions, sectors, and factors. Goldman Sachs believes earnings growth will remain the core driver of equity returns amid higher capital costs, rising government debt, and more persistent inflation.

Core views

The core view is that the market is undergoing healthy normalization: regional return dispersion is broadening, and the United States is no longer the only leading market; at the sector level, technology de-rating is occurring alongside repricing in industrials, energy, and other “old economy” sectors; at the factor level, a momentum pullback and the contraction of growth and quality premiums are increasing value opportunities. Lower equity correlations and broader single-stock dispersion are enhancing the scope for active management to generate alpha.

Analysis framework

The report compares regions including the United States, Europe, Japan, Asia-Pacific, emerging markets, and China using indicators such as regional equity index returns, earnings revisions, valuation multiples, free cash flow yields, ROE, relative sector valuations, factor portfolio performance, and stock correlations. It also analyzes the impact of technology capital expenditure, AI-related investment, momentum pullbacks, and changes in market concentration on asset allocation.

Methodology notes

• Equity StrategyRegional, Sectoral, and Factor Rotation Analysis

  Identify changes in market leadership through the relative performance of regions, sectors, and style factors.

  The report decomposes returns into earnings growth and valuation changes, and combines the performance of momentum, growth, quality, and value styles to assess whether opportunities are shifting from concentration toward broader dispersion.

• Valuation Analysis12-Month Forward P/E and Free Cash Flow Yield

  Measure changes in sector and market valuations using forward price-to-earnings ratios and free cash flow yields.

  The report notes that technology-sector P/E multiples have undergone significant de-rating, but free cash flow multiples remain high because of substantial capital expenditure requirements.

• Valuation ModelImplied Growth from a Single-Stage DDM

  Infer market expectations for future technology-sector growth using a dividend discount model.

  The report believes that implied growth for the technology sector has risen since 2020 but remains below the peak of the Internet bubble, suggesting that the issue is more likely earnings sustainability than a valuation bubble.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global Equities

  Core research subject

  Strengths

  Strong earnings growth, broader market participation, and more diversified regional and sectoral opportunities.

  Weaknesses

  Higher capital costs constrain valuation expansion, while the sustainability of earnings in some sectors remains questionable.

  Comparison

  Compared with the post-financial-crisis environment dominated by U.S. technology and growth stocks, current opportunities are more balanced.

  Risks

  Persistent inflation, elevated interest rates, downward earnings revisions, and renewed momentum trading.

• U.S. Equities

  Important regional allocation

  Strengths

  ROE remains attractive, technology-company earnings are strong, and selective re-entry may be possible after valuation declines.

  Weaknesses

  The market has recently lagged major regions due to mega-cap technology weightings and capital expenditure pressures.

  Comparison

  Relative to Europe, Japan, Asia-Pacific, and emerging markets, the United States no longer has the one-sided leadership advantage it enjoyed in the past.

  Risks

  AI capital expenditure returns falling short of expectations, slowing mega-cap technology earnings growth, and further valuation contraction.

• European Equities

  Beneficiary of value and old-economy rotation

  Strengths

  Benefits from spillover of technology capital expenditure, energy security, and improving infrastructure and defense spending.

  Weaknesses

  Long-term growth sensitivity may be weaker than that of U.S. technology, and valuations in some sectors have already risen.

  Comparison

  Compared with the technology-led U.S. market, Europe has greater exposure to value and industrial cyclicals.

  Risks

  Falling economic resilience, lower-than-expected policy spending, and reduced margin of safety after valuation recovery.

• Technology Sector

  Core sector of analysis

  Strengths

  Earnings growth remains strong, while AI, computing power, hardware, and chip demand support selected subsectors.

  Weaknesses

  Surging capital expenditure is eroding free cash flow, while valuation premiums in software and mega-cap technology have contracted significantly.

  Comparison

  After declining from being the most expensive sector, it is now near its 20-year average, while industrial-sector valuations have surpassed those of technology.

  Risks

  Earnings bubbles, uncertain returns on AI investment, cyclicality in hardware and semiconductors, and disruption risks for software.

• Industrials and Old-Economy Sectors

  Beneficiary of rotation

  Strengths

  Growth expectations are improving, supported by technology capital expenditure, energy security, critical infrastructure, and defense investment.

  Weaknesses

  Some valuations have risen above their 20-year ranges, requiring subsequent earnings delivery for support.

  Comparison

  In contrast to technology-sector de-rating, industrials have become one of the more highly valued sectors globally.

  Risks

  A slowdown in the capital expenditure cycle, adjustments to government spending, and excessively rapid valuation expansion.

Key data

• Equal-Weight S&P Relative PerformanceMore than 7.3%The degree of outperformance of the equal-weighted S&P relative to the market-cap-weighted S&P 500, reaching this level for the first time since 2009.
• Valuation Premium of the Five Largest U.S. StocksNearly eliminatedThe P/E ratio of the five largest U.S. stocks is only slightly higher than that of the remaining 495 stocks.
• Global Software Sector P/E PremiumApproximately 20%This is substantially below the premium of nearly 200% seen at the beginning of the century.
• Implied Technology GrowthHigher but below the Internet bubble peakEstimated using a single-stage DDM based on a fixed 4.0% ERP.
• China ROEBelow its historical averageThe report states that China is the only major market whose ROE is below its own historical average.

Impact & implications

For investors, the implication is that the risk-reward ratio of simply betting on large U.S. technology and momentum growth has deteriorated, while the return compensation for cross-regional, cross-sectoral, and cross-style diversification has increased. Technology de-rating does not necessarily imply a uniformly bearish outlook; instead, it may create selective value opportunities in growth areas where earnings growth remains strong.

Risks

• Future returns on technology- and AI-related capital expenditure may fall short of expectations.
• Earnings at hardware, memory, and chip companies are cyclical, and current high growth may not be sustainable.
• Higher government debt, increased issuance, and persistent inflation may keep capital costs elevated.
• Momentum pullbacks may cause sharp single-stock volatility and short-term portfolio losses.
• China's profitability below its historical average may weigh on regional allocation performance.
• This report is thematic strategy research and does not provide independent investment advice on any individual security.

What to watch

• Whether global earnings revisions continue to improve.
• Changes in capital expenditure, free cash flow, and financing needs at large U.S. technology companies.
• Whether technology-sector P/E and free cash flow valuations continue to converge.
• Whether industrials, energy, infrastructure, and defense-related industries can deliver earnings growth.
• The sustained performance of equal-weighted indices relative to market-cap-weighted indices.
• Whether equity correlations continue to decline and opportunities for active-management alpha continue to expand.