The Great Rotation Begins: Which Sectors Are Winning in January

As the first month of the year comes to a close, traders’ hopes for the “Great Rotation” are finally beginning to materialize. Everyone is just waiting for the money to start flowing in. The good news is that the stock market is expanding in January. Ten out of 11 sectors in the S&P 500 are up this month, with only the technology sector down by 1%. Leading the growth are healthcare, energy, finance, and industrial companies. Here’s how the sectors of the S&P 500 performed in January:

• Communication Services – +6.6%
• Healthcare – +6.4%
• Finance – +6.1%
• Materials – +5.5%
• Industrial Sector – +5.0%
• Consumer Discretionary – +4.2%
• Energy – +4.1%
• Real Estate – +1.8%
• Consumer Staples – +1.3%
• Utilities – +1.1%
• Technology – -0.5%

“This shows that the rally is broadening, and this is exactly what we predicted and wanted to see,” said Nick Reich from Earnings Scout.

Bad News: The Money Is Still Not There

On Wall Street, there’s an old saying: “Money flows follow performance.” In other words, when prices of less-loved stocks and sectors begin to rise, traders eventually start chasing them. This is still missing. Last year, traders poured money into broad technology funds while pulling money from other sectors like healthcare, energy, and consumer staples. This trend has slowed, but it continues into January.

Leading ETF Flows by Sector for January:

• Technology – $3.7 billion incoming flows
• Finance – $1.8 billion incoming flows
• Utilities – $600 million incoming flows
• Consumer Discretionary – $515 million incoming flows
• Communication Services – $422 million incoming flows
• Consumer Staples – $419 million incoming flows

But while technology continues to attract capital, the opposite situation exists in healthcare and energy. There has been an outflow of funds from these sectors for over a year, and the trend continues in January.

Lagging ETF Flows by Sector for January:

• Energy – $1.6 billion outgoing flows
• Healthcare – $892 million outgoing flows
• Materials – $696 million outgoing flows
• Real Estate – $583 million outgoing flows

Although these outflows aren’t huge, they reflect the trading trend from the past year.

Conclusion: “It’s Still All About Technology”

“We’re still fully in technology,” said Todd Sohn, head of the ETF department at Strategas.

Challenges Outside Technology

The technology sector has become a “sticky” asset for traders because they have long been rewarded for holding broad technology funds. The S&P Technology ETF (XLK) has outperformed the S&P 500 in four of the last five years and has risen by 145% since the beginning of 2020, compared to an 88% increase for the broad S&P 500 index. But there are two main problems for those wanting to direct traders outside of technology:

1. Recency Bias – Traders give more weight to recent gains in technology because these sectors have been performing well lately.
2. Gambler’s Fallacy – Traders who have won from technology stocks believe their luck won’t change (excessive overconfidence). These cognitive biases cause traders to make mistakes, such as insufficiently diversifying their portfolios.

But no one wants to admit this until something bad happens. Sohn compares traders’ unwillingness to move away from technology to the five stages of grief – first denial, then anger, bargaining, depression, and finally acceptance. “Technology traders definitely haven’t accepted that the rally is over,” said Sohn. “I think we’re still in the denial and anger stages. We’re far from a paradigm shift.”

This analysis is made even more complex because we still don’t know how news about DeepSeek will affect the investment environment in technology. For now, however, no significant effect has been observed.

Cathie Wood’s Fund Proves the Thesis

Another way to see how “sticky” technology can be for traders is to analyze Cathie Wood’s ARK Innovation ETF (ARKK). The fund saw explosive growth in the early months of COVID in March 2020. Its price surged from about $40 to a peak of $155 by February 2021. However, by the end of 2022, its value dropped to $31 – an 80% crash in less than two years. Despite this, traders continued to pour money into it. From 40 million shares in circulation, the number rose to over 200 million by June 2022. By the end of 2023, there were still 180 million shares, even though the fund was 65% below its 2021 peak. Only then – three years after the highs – did large-scale sell-offs begin. Today, the fund has 108 million shares in circulation.

Less-Loved Sectors

Many traders are waiting for healthcare to make a comeback. Will it come from actively managed funds? Unlikely – there aren’t enough of those to make a difference. Even Cathie Wood’s ARK Genomic Revolution ETF (ARKG) has been losing assets since 2021. Interestingly, it’s so easy to underweight technology if one wishes. For example, the ProShares S&P 500 Ex-Technology ETF (SPXT), which excludes the technology sector, has seen an increase in incoming flows since late December. But the fund is small ($187 million), meaning that only a small group of traders is betting on poor technology performance in 2025.