Analysis and Forecast of Leading Sector Rotation in the US Stock Market for 2026

Abstract

Sector rotation is central to equity allocation because relative industry performance changes with macro conditions, volatility, and investor risk appetite. This study examines the U.S. equity market with monthly data from January 2007 to December 2025 and models the joint dynamics of market variables and five clustered sector groups through a three-state MSIH(3)-VAR(1) framework. The sample combines the S&P 500, VIX, unemployment, credit spreads, an economic growth factor, and industry return clusters constructed from 49 Fama-French industries. Results show that the bull market regime dominates the sample, has the longest average duration, and is associated with lower volatility and stronger technology performance, whereas bear states are shorter and defensive sectors remain relatively resilient. Out-of-sample forecasts for January 2023 to March 2026 achieve high regime consistency but much weaker sector hit rates, implying that macro regimes explain broad market environments better than high-frequency leadership shifts. The findings support regime-switching models as useful tools for strategic allocation, risk monitoring, and structured discussion of sector rotation.