(Jan 16) : Stocks rebounded as a blowout outlook from an artificial-intelligence bellwether revived hopes about the longevity of a key bull-market driver while signs of economic strength lifted small caps.
A gauge of chipmakers hit all-time highs as Taiwan Semiconductor Manufacturing Co., Asia’s most valuable company, assuaged concerns about the sustainability of current data-center spending. Nvidia Corp. jumped over 2% and ASML Holding NV notched a record. Small caps kept rising, with the Russell 2000 beating the S&P 500 for a 10th straight session — the longest streak since 1990.
“Technology stocks had looked vulnerable in recent weeks as investors rotated away from megacap names and into more cyclical areas of the market,” said Fawad Razaqzada Forex.com. “TSMC’s update, though, appears to have stabilized that ‘rotation’ rather than reversed it outright.”
That balance between tech optimism and broader participation should remain a defining feature in the weeks ahead, he noted.
A run of stronger-than-expected economic data has helped shape a growing sense that conditions are improving, with investors chasing riskier parts of the market that typically benefit in that scenario.
Bonds fell as data showed a resilient labor market, with jobless claims sliding to the lowest since November. New York state factory activity expanded, while a gauge of prices received dropped to an almost one-year low.
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Several Federal Reserve officials speaking Thursday signaled a willingness to pause rate cuts at their upcoming policy meeting, citing a labor market that appears to be stabilizing and ongoing inflation pressures.
The S&P 500 rose 0.3%. A gauge of chipmakers jumped 1.8%. Also aiding sentiment was a US deal with Taiwan to cut tariffs and boost chip investment. The Russell 2000 added 0.9%. Goldman Sachs Group Inc. is raising billions in a massive bond sale after reporting solid results. Morgan Stanley’s debt bankers boosted revenue 93% in the fourth quarter.
The yield on 10-year Treasuries rose four basis points to 4.17%. The dollar wavered. Oil sank as President Donald Trump signaled he may hold off on attacking Iran for now. Silver slid after a blistering rally and as the US refrained from imposing import tariffs on critical minerals.
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“Tech in general, and AI in particular, remain the key to the equity market’s zeitgeist,” said Steve Sosnick at Interactive Brokers. “Good news from that sector keeps the stock market humming.”
TSMC is earmarking as much as US$56 billion in capital spending for 2026, a stronger-than-anticipated projection. The company expects expenditures of US$52 billion to US$56 billion this year, up at least a quarter from 2025. It also foresees revenue growth of close to 30% in 2026, faster than the average analyst estimate.
“It might seem odd to reward a company simply because it’s spending more money than anticipated, but there are two major positive takeaways when a key semiconductor manufacturer makes an announcement of that sort,” noted Sosnick.
First, only a thriving company can afford to spend even more billions than it was already planning to, he said. Second, that money will be spent with key suppliers, boosting their prospects as well, Sosnick concluded.
Thursday’s action suggests a bit of “bargain hunting” – especially in the tech space after the TSMC news as well as the recent pullback, according to Kenny Polcari at SlateStone Wealth.
“If earnings continue to beat expectations and economic data remains supportive, the likely path remains advance, backfill, then advance again,” he noted.
This earnings season will give investors confidence in the durability of earnings growth, which is a key driver for market returns over the next 12 months,” said Ulrike Hoffmann-Burchardi at UBS Global Wealth Management.
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“We maintain our S&P 500 year-end target at 7,700 and recommend under-allocated investors add exposure to our preferred areas,” she noted. The gauge is currently around 6,945.
While stocks are bouncing as the technology sector is getting a boost, there is growing evidence that not only are we seeing some “rotation” between different sectors in the marketplace, but we’re also seeing some of that rotation within the tech sector, according to Matt Maley at Miller Tabak.
“Investors seem to be a lot more confident that chip stocks can continue to grow their profits while they’re not so sure that the buyers of all of these chips — the hyperscalers — will see the same kind of profit growth,” Maley said.
As the hyperscalers keep buying chips, it obviously helps the profits of those companies, he noted. However, if the cost of buying those chips does not subside, the hyperscalers are going to have a tough time increasing their profits especially since the prices they are charging for the end products are not moving up.
“Overall, a broad-based bounce arguably should begin again in US equity indices, but gains likely could depend on the ‘Magnificent Seven’ showing a bit more stabilization after recent weakness,” said Mark Newton at Fundstrat Global Advisors.
The stock market’s primary uptrends remain intact, and breadth is improving; however, investors need to be tactical and selective with these rotations to generate “alpha,” said Craig Johnson at Piper Sandler.
In reverse leapfrog action, small caps have posted higher year-to-date returns than mid caps, which have outpaced large caps, noted Sam Stovall at CFRA. Valuations are contributing to the rotation. And 2026 quarterly estimates for these mid- and small-cap indices are expected to outpace comparative growth for the large-cap benchmark, he added.
“As a result, this projected acceleration in earnings-per-share growth rates should allow for continued relative price outperformances for these smaller asset classes, Stovall concluded.
‘Greater Scrutiny’
A strong macro environment in 2026, supported by easier monetary conditions and robust fiscal stimulus across major economies, is likely to favor cross-regional performance, according to Magdalena Ocampo at Principal Asset Management.
“AI, which has fueled US large-cap tech gains, faces greater scrutiny as investors shift focus from aggressive AI-related spending to profitability,” she said. “While US tech allocation remains important, it may be prudent for investors to diversify into regions offering direct or indirect AI exposure at more attractive valuations and benefiting from supportive policy tailwinds.”
Ocampo also notes that AI reinforces the importance of maintaining US exposure given its tech leadership. Still, concerns over aggressive AI-driven spending and high valuations heighten pressure for companies to deliver on earnings.
“Given US equity market concentration, investors should seek diversification,” she said.
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