Investors may be getting ahead of themselves by rushing into defensive positions. Bank of America is urging markets to stay invested and focus on sector rotation rather than risk reduction, arguing that cyclical stocks remain more attractive than defensives at the start of 2026 - even as positioning in some areas looks crowded, DKNews.kz reports.
“Rotation, Not Retreat”
According to BofA, the right strategy for the first quarter is “rotation, not retreat.” That means adjusting portfolio exposure rather than pulling capital out of equities or piling into cash.
The bank recommends shifting allocations toward value-oriented cyclical sectors, which tend to perform better during periods of economic normalization and improving activity.
Where BofA Sees Opportunity
Bank of America highlights several areas where investors may find better risk-reward in early 2026:
- banks and financials
- real estate
- materials and commodities
- industrial companies
- small- and mid-cap stocks
These segments, BofA argues, are better aligned with the current phase of the economic cycle than traditional defensive assets.
What to Do With the “Magnificent Seven”
BofA also addressed the market’s most crowded trade - the “Magnificent Seven” mega-cap technology stocks that have served as de facto defensive holdings in recent years.
The message is clear: hold, but do not add. While these stocks remain core positions, heavy concentration and stretched positioning mean their ability to continue outperforming the broader market may be limited in the near term.
Big Cash Inflows Reflect Seasonality, Not Panic
The advice comes as investors have been moving large sums into safe assets. Over the past week, money market funds attracted $148.5 billion, marking the third-largest weekly inflow on record.
However, Bank of America sees this as typical for the first week of the year, when investors often park cash temporarily before redeploying it. The bank does not view the move as a lasting shift toward risk aversion.
Why This Matters Now
BofA’s call reflects a broader shift in market thinking. Rather than abandoning risk, investors are being encouraged to reposition for the next phase of the cycle, where leadership may rotate away from mega-cap tech and toward more economically sensitive sectors.
If the bank’s outlook proves correct, early 2026 could mark a period in which cyclical and value stocks begin to reclaim leadership, making asset allocation - not market timing - the key driver of returns.
