Is the "Great Rotation" Reshaping Portfolios in 2026

Key Takeaways

• Kovitz Investment Group Partners has significantly trimmed positions in mega-cap tech and other large-cap holdings, signaling a strategic shift away from concentrated growth.
• This move aligns with a broader "Great Rotation" in early 2026, where capital is flowing from dominant tech giants into small-cap and value-oriented segments.
• While AI remains a powerful theme, investors are increasingly scrutinizing valuations and the sustainability of returns from massive AI infrastructure spending.

Is the "Great Rotation" Reshaping Portfolios in 2026?

The investment landscape in early 2026 is undergoing a notable transformation, with multi-billion dollar fund Kovitz Investment Group Partners making significant cuts to its positions in several market behemoths. Recent 13F filings reveal substantial reductions in holdings like Johnson & Johnson (JNJ), Dollar Tree (DLTR), and Advanced Micro Devices (AMD). This strategic rebalancing by a prominent institutional investor suggests a potential shift away from the mega-cap growth stocks that have dominated market performance for years, aligning with a broader trend dubbed the "Great Rotation."

This rotation sees capital moving from a handful of "Magnificent 7" companies towards a wider array of small-cap and value-oriented stocks. The Russell 2000 Index, a barometer for small-cap performance, has surged over 7% year-to-date, while the S&P 500 has remained nearly flat. This divergence highlights a fundamental reappraisal of value, as investors seek opportunities beyond the tech-heavy benchmarks that defined the previous half-decade. Kovitz's actions, therefore, are not isolated but rather indicative of a deeper market recalibration.

Institutional investors, who once parked capital in the largest tech names for perceived safety, are now actively seeking higher beta and more attractive valuations elsewhere. The valuation gap between small caps and the S&P 500 had reached a 25-year extreme by early 2026, with small caps trading at a modest 18x forward earnings compared to the S&P 500's steep 22x+ multiple. This discrepancy, coupled with a 65% earnings beat rate among Russell 2000 components in Q4 2025, created a "coiled spring" effect that has now been unleashed.

The market is moving from a period of concentrated gains to one where market breadth is expanding, offering new avenues for alpha generation. Kovitz's adjustments reflect a proactive approach to this evolving environment, prioritizing risk-return characteristics over continued exposure to potentially overvalued segments. This shift underscores a growing conviction that stock selection and sector allocation will matter more than simply owning passive indices of the largest companies in the months ahead.

Why Are Mega-Cap Techs Facing Increased Scrutiny?

The once-unassailable dominance of mega-cap technology stocks is facing unprecedented scrutiny in 2026, driven by concerns over sky-high valuations and the sustainability of returns from massive AI investments. Companies like Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Broadcom (AVGO) have seen their market capitalizations swell, with Apple reaching $4.00 trillion and Microsoft at $2.89 trillion. However, these valuations now come with a hefty price tag that some investors, including Kovitz, are questioning.

Consider the valuation multiples: Apple trades at a P/E of 34.08x, P/S of 9.18x, and P/FCF of 32.43x. Microsoft, while slightly less stretched, still commands a P/E of 24.24x, P/S of 9.46x, and P/FCF of 37.31x. Broadcom stands out with an even higher P/E of 66.60x and P/S of 24.16x. These figures, particularly when compared to historical averages and the broader market, suggest that much of the future growth is already priced in. The inflation-adjusted 10-year Shiller P/E ratio, sitting just over 40, is at its highest level since the dot-com boom, historically signaling potential market corrections.

The narrative around AI, while still powerful, has become more nuanced. Initial excitement fueled record capital expenditures by hyper-scalers, but investors are now asking whether this spending will produce returns that justify the valuations. Microsoft, for instance, saw a pullback after its fiscal Q2 earnings due to a 66% year-over-year increase in capital expenditures, mostly for AI. There are growing fears that AI could rapidly commoditize certain software categories, compress pricing, and rearrange competitive moats, turning "quality software" into a disruption story rather than a growth engine.

Furthermore, market performance has broadened recently, with the equal-weight S&P 500 outperforming the traditional cap-weighted index. This indicates that gains are increasingly coming from the average stock rather than a handful of mega-caps. Retail investors, too, appear to be using Big Tech stocks as a source of funds to buy small caps, cyclicals, commodities, and international exposure. This collective shift in sentiment and capital allocation is exerting pressure on mega-cap tech, prompting funds like Kovitz to re-evaluate their exposure.

What Specific Moves Did Kovitz Make?

Kovitz Investment Group Partners' recent 13F filings reveal a calculated reduction in several high-profile holdings, reflecting a strategic rebalancing rather than a wholesale exit. These moves underscore the firm's conviction in navigating the current market environment by trimming exposure to stocks where risk-return characteristics may have become less favorable. The reductions were significant, but often left Kovitz with substantial, albeit smaller, positions.

One notable cut was in Johnson & Johnson (JNJ), where Kovitz decreased its position by a substantial 45.0% in the third quarter. The fund sold 201,160 shares, leaving it with 246,055 shares valued at approximately $45.62 million. This reduction comes despite several potential upside catalysts for JNJ, including reports of exploring a ~$20 billion sale of its orthopedics unit, strong Phase 1b/2 data for amivantamab, and a $1 billion cell-therapy investment. However, recent insider selling and analyst caveats have added selling pressure, with the stock reported down 1.9% in the update.

Kovitz also trimmed its stake in Dollar Tree, Inc. (DLTR) by 10.8%, selling 96,517 shares. The institutional investor now owns 800,705 shares of the discount retailer, valued at about $75.56 million. This move occurred even as Dollar Tree beat Q3 expectations, reporting $1.21 EPS (vs. $1.09 est.) and $4.75 billion revenue (up 9.4% YoY), and set Q4 2025 guidance of $2.40–$2.60 EPS. High institutional ownership at ~97.4% and mixed analyst ratings ("Hold" consensus with an average price target of $124.62) suggest a crowded trade that Kovitz may be de-risking from.

Finally, Kovitz lessened its stake in Advanced Micro Devices, Inc. (AMD) by 2.1%, selling 37,819 shares. Despite this trim, AMD remains a significant holding, with Kovitz owning 1,805,893 shares worth approximately $292.18 million, making it the fund's 15th largest position and representing about 1.1% of its portfolio. AMD has shown strong fundamentals, beating quarterly estimates with $1.53 EPS and $10.27 billion revenue (up 34% y/y). However, insider selling and stiff competition from Nvidia likely contributed to Kovitz's decision to rebalance its weight, seeking other portfolio names with stronger risk-return characteristics, as they stated in a prior rebalancing of Motorola Solutions.

Where is Capital Flowing Amidst the "Great Rotation"?

As institutional investors like Kovitz pare back their exposure to mega-cap tech, the natural question arises: where is this capital being redeployed? The "Great Rotation" narrative suggests a broad reallocation of funds into segments that offer more compelling valuations and diversified growth prospects. This shift is manifesting in several key areas, moving beyond the concentrated gains of the past few years.

Small-cap stocks are a primary beneficiary, with the Russell 2000 Index outperforming the S&P 500 by its widest margin in decades during the first two months of 2026. This rally is fueled by a significant valuation gap, where small caps were trading at a modest 18x forward earnings compared to the S&P 500's steeper 22x+ multiple. The strong 65% earnings beat rate among Russell 2000 components in Q4 2025 further validates this segment's potential. Current consensus estimates for 2026 forecast a 19% year-over-year earnings growth for the Russell 2000, significantly higher than the 12.5% projected for the S&P 500, suggesting the rotation may be in its early innings.

Beyond just size, the rotation is also favoring value-oriented stocks and companies deeply tied to the "old economy" and domestic infrastructure. Firms like Willdan Group (WLDN), which has transformed into an infrastructure powerhouse providing energy-efficient engineering for data centers, and Gorman-Rupp (GRC) are emerging as standouts. This trend is bolstered by targeted fiscal policies, such as the OBBBA (Omnibus Budget Reconciliation Act), which supports domestic industrial and healthcare sectors.

Localized biotech companies, including Dianthus Therapeutics (DNTH) and Ligand Pharmaceuticals (LGND), are also seeing increased interest. These firms are benefiting from the reversal of 2017-era tax rules on R&D, making their clinical pipelines significantly more valuable to potential acquirers. Furthermore, some energy small-caps, such as CleanSpark (CLSK), are strategically pivoting operations toward high-performance computing (HPC) and AI infrastructure colocation, demonstrating that the small-cap space is not merely "old economy" but actively capturing the next wave of technological evolution at a much lower entry price than mega-cap alternatives.

Navigating the Evolving AI Landscape: Disruption and Opportunity

The AI narrative, while still a dominant force, is undergoing a critical re-evaluation by sophisticated investors. The initial euphoria, driven by record capital investment from hyper-scalers, is now tempered by emerging concerns about the actual return on investment and the potential for AI to disrupt established business models. This nuanced perspective is influencing how funds like Kovitz are approaching technology investments.

Hedge funds, after weeks of selling in technology, are now "creeping back into tech," but with a highly selective approach. This re-entry is less about a broad "AI beta" play and more about "relative-value frameworks." Managers are going long on resilient incumbents that can adapt to AI, while simultaneously shorting structurally threatened names. This strategy reflects a market where conviction in dispersion is rising, meaning stock selection is becoming paramount as the AI story evolves.

The core debate revolves around several critical questions: Will AI spending produce returns that justify the massive capital expenditures and current valuations? Will AI compress software margins faster than incumbents can adapt? And will productivity gains boost growth broadly, or concentrate gains in a small set of firms? These uncertainties are driving a more cautious and discerning approach to tech investments.

For example, while Advanced Micro Devices (AMD) has strong AI catalysts, including a $300 million Crusoe loan backstop, it also faces stiff competition from Nvidia and has seen insider selling. This highlights the double-edged sword of the AI revolution: immense opportunity but also significant competitive and execution risks. Investors are increasingly looking for companies that are not just building AI, but effectively adopting it to enhance their core businesses, or those providing critical infrastructure at a more reasonable valuation.

The market is moving from panic to price discovery, where the forced unwind of crowded tech positions is easing, and the risk-reward has improved in specific parts of the sector. This means managers are adding targeted risk, often through long/short pairs, rather than simply buying broad tech exposure. The focus is on identifying companies with durable cash flows, strong balance sheets, and a clear path to monetizing AI, rather than simply chasing every AI-related headline.

What Does This Mean for Investors?

For individual investors, Kovitz Investment Group Partners' recent portfolio adjustments and the broader market trends signal a crucial shift: the era of simply "buy and hold" mega-cap tech for outsized returns may be giving way to a more nuanced, stock-picker's market. The "Great Rotation" emphasizes the importance of diversification beyond a handful of dominant tech giants and a deeper dive into valuation metrics.

Investors should scrutinize the valuations of their holdings, particularly in the tech sector. While growth is appealing, the current P/E, P/S, and P/FCF ratios of many mega-caps suggest that future growth is heavily discounted into current prices. A high Shiller P/E ratio, as seen today, historically precedes market corrections, urging caution. This doesn't mean abandoning tech entirely, but rather seeking out companies with more reasonable valuations or a clearer, more defensible path to AI-driven profitability.

Consider diversifying into small-cap and value-oriented segments, which are showing strong momentum and more attractive valuations. The Russell 2000's projected 19% earnings growth for 2026, compared to the S&P 500's 12.5%, highlights the potential in these overlooked areas. Look for companies benefiting from domestic infrastructure spending, onshoring trends, or specialized biotech plays, as these sectors are attracting significant institutional capital.

Ultimately, the market is rewarding active management and selective risk-taking. The focus should be on identifying companies with strong fundamentals, clear competitive advantages, and a disciplined approach to capital allocation, rather than chasing momentum in crowded trades. This environment demands a more strategic and less passive approach to portfolio construction.

The market is clearly signaling a shift, moving away from the concentrated dominance of a few tech giants towards a broader, more diversified landscape. Investors who adapt to this new regime, prioritizing value, diversification, and rigorous stock selection, are likely to be best positioned for the opportunities ahead.

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