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Hedge funds are recalibrating their portfolios, moving away from the software sector and small-cap stocks to embrace traditional "old economy" industries like industrials and energy. This strategic shift, based on comprehensive Q4 2025 data, offers investors insights into emerging sector trends and key company opportunities in 2026.
According to a recent Goldman Sachs report analyzing Q4 2025 hedge fund activity, hedge funds managing $4.4 trillion in equity positions, about 6.4% of the U.S. equity market, posted a modest 1.5% gain year-to-date through mid-February 2026. However, this aggregate performance conceals significant sector rotation: funds have trimmed software holdings amid fears of rapid disruption by generative AI innovations, notably from companies like Anthropic.
Short selling played a pivotal role in returns, with concentrated short baskets gaining 9%, outpacing indices such as the S&P 500 and Nasdaq 100. The median short interest in S&P 500 stocks is approximately 2.7% of free float, one of the highest since 1995, although shorts remain diversified rather than focused on high-profile "short squeezes".
Hedge funds are reallocating internally within tech, decreasing software exposure in favor of semiconductor companies. For the first time since 2018, chipmakers now occupy a larger share of hedge fund long portfolios compared to software firms.
Key semiconductor names gaining traction include Applied Materials, Micron Technology, Nvidia, and Teradyne. Conversely, hedge fund holdings in software firms like Salesforce and DocuSign have declined. Despite shifts, Microsoft remains a fundamental holding, alongside increased positions in Amazon, Nvidia, and Tesla. Conversely, exposure to Meta Platforms has decreased, while Alphabet, Microsoft, and Apple show balanced buying and selling.
ETFs accounted for 4.7% of hedge fund long positions in Q4 2025, matching 2024 highs and marking some of the highest levels since the 2008 financial crisis. Yet, ETFs serve a dual role: hedge funds hold approximately $255 billion in ETFs short positions, representing 65% of their total ETF exposure. This hedging contrasts with individual stocks, where shorts account for roughly 32% of exposure.
Hedge funds have notably increased stakes in industrials, raw materials, and energy sectors, concurrently reducing exposure to healthcare and communication services. Early 2026 data reveals a record 734 basis points overweight in industrial stocks relative to the Russell 3000 index.
Industrial giants like Boeing and GE Vernova have joined hedge fund VIP lists, highlighting renewed capital allocation toward capital-intensive and cyclical sectors.
Goldman Sachs identified 20 "rising stars" within hedge fund portfolios in Q4 2025, averaging $46 billion market capitalization, up from $32 billion in the previous quarter. Historically, such rising hedge fund favorites often outperform peers over subsequent quarters.
Eaton, headquartered in Dublin, specializes in energy management systems across sectors including data centers, utilities, and aerospace. Its diverse segments span Electrical Americas, Electrical Global, Aerospace, Vehicle Components, and eMobility solutions.
The company plans to spin off its automotive components business by Q1 2027 to focus on high-margin energy infrastructure, aerospace, and data center systems.
Strategic acquisitions such as the $1.4 billion Fibrebond deal have strengthened Eaton's data center power capabilities, while its $1.6 billion Ultra PCS acquisition expands aerospace and defense offerings. Additionally, the pending $9.5 billion purchase of Boyd Thermal bolsters liquid cooling solutions crucial for AI server infrastructure.
As AI computing power increases, potentially pushing data center rack power consumption from tens to 1,000 kW by 2028, the demand for advanced liquid cooling technology is surging. Eaton forecasts the liquid cooling market to expand annually by 35%, reaching over $6 billion by 2028.
In 2025, Eaton achieved record $27.4 billion revenue, growing 10% over the prior year, mainly driven by organic growth in data centers, aerospace, and industrial equipment. Slight margin pressures from input cost inflation were offset by higher sales volume. Backlog stands robust at $19.8 billion.
Eaton's free cash flow improved significantly, supported by moderate capital expenditures. Despite an expanded $9 billion buyback authorization, share repurchases paused in 2026 due to the Boyd Thermal acquisition. Market capitalization as of 2025 is approximately $138 billion.
With strong positioning in electrification and infrastructure modernization, Eaton offers compelling long-term growth potential.
ITT Inc. manufactures critical components such as brake systems, pumps, valves, and electrical connectors for transportation, industrial processes, and energy sectors. Its three core units—Motion Technologies, Industrial Process, and Connect & Control Technologies—ensure recurring OEM partnerships and steady revenue streams.
In 2025, ITT secured substantial contracts supporting decarbonization projects in Australia and oil and gas infrastructure in Argentina, alongside robust defense sector growth with U.S. Army helicopter system contracts and aviation orders.
The $4.8 billion acquisition of SPX FLOW in December 2025 broadens ITT’s industrial process footprint and decreases automotive reliance.
Annual revenue grew 8.5% to $3.94 billion with moderate margin growth and operating income of $684.5 million. Despite slight net profit decline due to acquisition debt and tax increases, cash flow improved.
ITT's shareholders benefit from a $1.4 annual dividend per share, around 0.78% yield, coupled with an active $1 billion buyback program.
Focused on niche engineered components with limited competitors, ITT presents an attractive investment for strategic, patient investors.
TD Synnex stands as a global leader in IT hardware distribution and solution aggregation, connecting over 150,000 customers with 2,500 vendors across 100 countries. The company thrives in the $2.8 trillion IT equipment market by specializing in indirect sales channels dominant in cybersecurity, IT services, and communications.
Revenue in fiscal 2025 surged by over $4 billion due to growth in cloud infrastructure and endpoint devices, especially across Europe and the Americas. Gross margins rose to 7.0%, supported by favorable product mix and operational efficiencies. Operating income and cash flow both improved, the latter reaching $1.5 billion through strategic working capital management.
The firm rewards shareholders with a quarterly dividend yielding about 1.2% and maintains a $3 billion authorized buyback program, having repurchased roughly $2.4 billion to date.
TD Synnex represents a stable investment in a structurally essential market, though margin expansion remains a key factor for further upside.
For investors seeking to align with smart money trends, these portfolio rotations highlight sectors and companies benefiting from major macroeconomic and technological evolution poised to shape 2026 and beyond.
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