US investors ended 2025 on a high note, pouring $16.89 billion into equity funds in the final week of the year.
The “AI-driven rally” has delivered a third consecutive year of green finishes for the major indices: Nasdaq (+20.4%), S&P 500 (+16.4%), and Dow Jones (+13.0%).
📊 FLOW DYNAMICS: The “Big Tech” Safety Trade
1️⃣ Large-Cap Obsession: The inflows were incredibly concentrated.
- Large-Cap Funds: Attracted $16.87 billion (virtually capturing the entire net inflow).
- The Divergence: Investors actually sold Small-Cap (-$1.42B) and Mid-Cap (-$269M) funds. This signals a preference for quality and established AI winners over broader economic risk.
2️⃣ The 2026 Earnings Bull Case: Why the optimism? Analysts have upgraded their outlook.
- 2026 Forecast: Earnings growth expected to hit 15.13%.
- Acceleration: This is a 2.2% upgrade from the 12.92% growth seen in 2025.
3️⃣ Bond Reversal & The Cash Wall:
- Bonds: After 12 weeks of buying, investors pulled $2.09 billion out of US bond funds, specifically targeting Government/Treasury funds (-$5.43B).
- Dry Powder: A massive $83.71 billion surged into Money Market funds—the largest weekly add in a month.
💡 ANALYST TAKEAWAY: The flow data reveals a clear strategy for early 2026: “Barbell Caution.” Investors are chasing high-growth Large Caps (to capture the 15% earnings upside) while simultaneously hoarding massive amounts of cash ($83B) in money markets. The lack of participation in Small-Caps suggests the market isn’t ready to bet on a broad-based economic lift just yet.
👇 Strategists: With earnings expected to accelerate to 15%, is it finally time to rotate out of Cash and into Small-Caps?