NEW YORK, Jan 20, 2026, 06:04 EST
- Small-cap stocks have surged early in 2026, sparking renewed chatter about a market rotation.
- Analysts focus on the initial 10 trading days to gauge momentum and risk appetite quickly.
- U.S. markets coming back from the holiday break mark the trade’s first real test, with earnings reports starting to hit.
Smaller-company stocks finished last week strong, with the Russell 2000 hitting a record close on Jan. 16, outpacing the S&P 500 for the 11th session in a row, the Wall Street Journal reported. The index has surged roughly 7.9% this year, leaving the early gains in the S&P 500 and Nasdaq in the dust. (Wall Street Journal)
That early edge counts since the U.S. rally has leaned heavily on mega-cap tech for years. If smaller firms keep pushing ahead, it signals investors are branching out beyond the so-called Magnificent Seven — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla.
Trading picks up Tuesday following the Martin Luther King Jr. Day break, with the calendar quickly filling up. Earnings reports, shifts in rate expectations, or a single negative headline could easily derail rotation trades.
Money has been flowing out of big-tech proxies, with the Roundhill Magnificent Seven ETF falling 1.6% in January, MarketWatch reports. At the same time, the Invesco Equal Weight S&P 500 ETF — which gives equal weight to companies rather than sizing by market cap — has gained 3.9%. “There’s a rotation into things that have been left behind,” said Keith Lerner, chief investment officer and chief market strategist at Truist Advisory Services. David Wagner, head of equities at Aptus Capital Advisors, described the small-cap rally as “unbelievable.” Meanwhile, Louis Navellier of Navellier & Associates noted that “the AI trade has become focused on the hardware side.” (MarketWatch)
Morningstar reports that basic materials are leading U.S. sectors so far this year, climbing 9.05%. Industrials and energy come next, while tech slips 0.40%. “We are most definitely seeing a rotation,” said Michael Arone, chief investment strategist at State Street. He added that as the earnings gap with the Magnificent Seven narrows, “this rally is broadening,” calling it a “healthy sign.” (Morningstar)
MarketGauge’s Geoff Bysshe highlighted the first 10 trading days of the year in a Seeking Alpha note, pointing to this period as a key momentum indicator for some traders. He noted that in nine of the past 10 years, stocks ended higher when small caps led after those initial sessions. Still, Bysshe emphasized that “what happens next” carries greater weight. (Seeking Alpha)
According to MarketGauge’s analysis, Bysshe highlighted that the iShares Russell 2000 ETF surged 6.63% in the first 10 days—a top-three start in recent years when small caps led. But whether it holds that lead? He calls it a “flip a coin,” pointing out small caps maintain the No. 1 spot only about 54% of the time. (Marketgauge)
Rotation refers to funds shifting on Wall Street from recent winners into underperformers — typically moving away from growth stocks toward cheaper, cyclical sectors connected to the economy. Small-cap stocks, usually carrying more debt and relying heavily on domestic sales, often gain when interest rates drop and growth remains stable.
The trade swings both ways. If inflation remains stubborn, pushing borrowing costs up, or if earnings fall short, smaller firms often take the initial hit. That can send the market retreating back toward the mega-caps everyone’s familiar with and holds.
Even the bulls backing rotation acknowledge this might just be a brief New Year’s shuffle, not a lasting shift. So far, the Russell 2000’s quick jump sets a clear challenge for January: will the broader rally stick around, or retreat back to Big Tech?
