As 2025 draws to a close, the divergence between the "new economy" and the "old economy" has reached a historic fever pitch. While the S&P 500 has surged to record highs, fueled by an insatiable appetite for artificial intelligence and mega-cap technology, traditional cyclical sectors—the bedrock of the industrial age—are languishing in the shadows. This growing performance gap is forcing a fundamental rethink of portfolio diversification, as the reliable "60/40" model faces its stiffest challenge in decades.
On December 23, 2025, the S&P 500 is tracking toward a year-to-date gain of approximately 16.5%, building on a spectacular 24.2% return in 2024. However, a closer look beneath the surface reveals a market of two halves. The Energy and Materials sectors, historically the engines of global growth, have managed only single-digit gains or flat returns over the same period. For investors, the immediate implication is clear: the broad market index is no longer a reflection of the "average" company, but rather a concentrated bet on a high-tech future that many cyclical stalwarts are struggling to join.
A Two-Year Slump: The Timeline of Cyclical Stagnation
The underperformance of cyclical stocks did not happen overnight; it is the result of a "perfect storm" of macroeconomic headwinds that began gathering in early 2024. While the "Magnificent Seven" tech giants, led by NVIDIA Corporation (NASDAQ:NVDA), provided the market with a liquidity drain, traditional sectors were hit by a combination of high interest rates and a cooling global industrial engine. Throughout 2024, the Materials sector was the only group in the S&P 500 to post a negative return, finishing the year down 1.2% while the broader index soared.
The situation grew more complex in 2025. Despite the Federal Reserve finally initiating a rate-cutting cycle in September, borrowing costs remained at 20-year highs for much of the year, stifling capital-intensive projects in the Industrials and Energy sectors. Meanwhile, the "China Factor" loomed large. A persistent slowdown in the Chinese property market and industrial output throughout 2024 and 2025 severely dampened global demand for commodities, leaving companies like Dow Inc. (NYSE:DOW) to navigate a "perfect storm" of high feedstock costs and weakening demand. By late 2025, Dow Inc. had been removed from the Dow Jones Industrial Average, replaced by Nvidia—a symbolic passing of the torch from the chemical age to the silicon age.
Initial market reactions to this trend were characterized by a "growth at any price" mentality. For much of 2025, investors viewed any rotation into value or cyclicals as a "value trap," preferring to hide in the perceived safety of high-margin tech companies. It wasn't until the final quarter of 2025 that analysts began to flag a potential "late-stage rotation," as the valuation gap between the market-cap-weighted S&P 500 and the equal-weighted version reached levels not seen since the dot-com era.
The Winners and Losers of the New Regime
The current market environment has created a stark list of winners and losers. In the winners' circle, JPMorgan Chase & Co. (NYSE:JPM) and The Goldman Sachs Group, Inc. (NYSE:GS) have proven that not all cyclicals are created equal. These financial giants have benefited from a steepening yield curve and a resurgence in investment banking fees in 2025, allowing them to keep pace with the broader market. Another outlier is Freeport-McMoRan Inc. (NYSE:FCX), which has outperformed its peers in the Materials sector due to the critical role of copper in building out the massive data centers required for the AI revolution.
Conversely, the list of laggards is populated by former industrial icons. The Boeing Company (NYSE:BA) has remained a massive weight on the Industrials sector throughout 2024 and 2025, plagued by safety crises, labor strikes, and delivery delays. In the logistics space, United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) have struggled to maintain margins as they navigate high labor costs and the loss of volume to Amazon's internal delivery network.
The Energy sector has faced its own set of challenges. Despite geopolitical tensions, oil prices remained volatile throughout 2025, swinging between $70 and $90. This volatility, combined with a shift in investor preference toward high-growth tech, left Chevron Corporation (NYSE:CVX) up only 3% year-to-date by late December. Even Exxon Mobil Corporation (NYSE:XOM), which showed more resilience, found itself trailing the index as its 3.7% dividend yield failed to entice investors away from the triple-digit gains seen in AI-linked hardware.
Wider Significance and Historical Precedents
This trend is more than just a temporary market quirk; it represents a structural shift in how the global economy is valued. The current disparity bears a striking resemblance to the Dot-com bubble of 1998–2000. During that period, "Old Economy" stocks like industrials and staples were largely ignored while internet stocks reached astronomical valuations. History shows that when that bubble eventually burst, the laggards became the new leaders. Between 2000 and 2002, Consumer Staples and Energy became the primary drivers of returns as the tech-heavy indices cratered.
The wider significance of this shift is also reflected in the changing advice from major investment firms. By late 2025, firms like BlackRock have effectively declared the traditional 60/40 portfolio model insufficient. They are now championing a "50/30/20" model, which trims bond allocations in favor of 20% in alternatives like private credit and infrastructure. This move is designed to capture "alpha" in a market where broad index "beta" is increasingly concentrated in just a handful of technology names.
Furthermore, the underperformance of cyclicals has regulatory and policy implications. The trade-exposed nature of the Industrials and Materials sectors has made them particularly sensitive to the tariff uncertainties following the 2024 U.S. election. As the world moves toward a more fragmented, "deglobalized" trade environment, the traditional cyclical playbook of relying on global supply chains is being rewritten, favoring companies that can successfully "onshore" their operations.
What Comes Next: Mean Reversion or a New Normal?
Looking ahead to 2026, the primary question for investors is whether we are on the verge of a massive mean reversion. Short-term, many analysts expect a "catch-up" trade. Goldman Sachs has predicted that Industrials and Materials will lead earnings growth in 2026 as tech growth begins to moderate. If inflation remains stable and the Fed continues its gradual easing, the lower borrowing costs could finally unlock the "pent-up" industrial demand that has been sidelined for two years.
However, a long-term strategic pivot may be required for those stuck in traditional cyclical models. Companies like Fiserv, Inc. (NYSE:FI) and other "fintech-adjacent" cyclicals are already showing that the path to success lies in integrating technology and AI into their core operations. The "winners" of the next decade may not be the pure-play tech companies, but rather the "old economy" companies that successfully use tech to optimize their supply chains and margins.
Market opportunities are likely to emerge in "Equal Weight" strategies. The Invesco S&P 500 Equal Weight ETF (RSP) is being increasingly recommended by advisors as a tool to "broaden out" portfolios. By December 2025, the market-cap S&P 500 traded at a P/E ratio of roughly 28x, while the equal-weight version sat at a much more reasonable 21x, offering a significant valuation cushion for those looking to exit the crowded tech trade.
Summary and Investor Outlook
The underperformance of traditional cyclical stocks relative to the S&P 500 in 2024 and 2025 marks a period of extreme market concentration and economic transition. While the "AI premium" has rightfully rewarded innovation, it has also left high-quality cyclical companies trading at significant discounts to their historical averages. The key takeaway for investors is that diversification today requires more than just owning an index fund; it requires a conscious effort to look past the "Magnificent Seven" and identify value in the sectors that build, move, and power the physical world.
Moving forward, the market will likely be defined by "dispersion"—a wide gap between the winners and losers within the same sector. Investors should watch for a potential "reversion to the mean" in early 2026, particularly if global industrial data begins to show signs of life. The era of "easy beta" through passive indexing may be giving way to a "stock-picker's market," where the ability to find undervalued cyclicals with strong balance sheets becomes the primary driver of outperformance.
As we enter 2026, the focus will shift from "how much AI do I own?" to "how much value have I missed?" For those with a long-term horizon, the current malaise in cyclicals may eventually be viewed as one of the greatest rebalancing opportunities of the decade.
This content is intended for informational purposes only and is not financial advice.