(Jan 15): A week-long rotation that has seen investors bail from richly priced technology names in favor of more economically sensitive industries picked up speed, sending the Nasdaq 100 to its worst decline in a month while lifting the majority of companies in the S&P 500.
While the US equity benchmark saw its first back-to-back losses in 2026 amid a slide in all “Magnificent Seven” shares, over 300 of its firms actually rose. Small caps continued to outperform, with the Russell 2000 beating the S&P 500 for a ninth straight session — matching the longest streak since 1990.
The first weeks of the year have been marked by a steady rotation out of giant tech companies, whose all-weather earnings made them safe bets at times of economic uncertainty, and into a broader category of firms tuned to improving growth prospects. The dominance of the tech cohort in benchmarks has occasionally allowed their declines to overwhelm indexes.
In a note titled “Not as Bad as It Looks”, Steve Sosnick at Interactive Brokers says a deeper look shows a more mixed market than the declines in major indices might indicate.
“This is a demonstration of what occurs when rotation affects the stocks that dominate key indices,” he added.
As earnings rolled in, Wells Fargo & Co sank after missing profit estimates while concern about Bank of America Corp’s expense outlook offset solid results. Citigroup Inc slipped as top executives reined in analyst exuberance about the bank racing toward the finish line on key regulatory requirements and reducing its expenses.
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“The expectations for this earnings season are very high,” said Matt Maley at Miller Tabak. “If those expectations are not met in today’s stock market — which is priced for perfection — it’s going to create some headwinds.”
Treasuries remained higher after a batch of economic data was seen as unable to justify a shift in expectations for monetary policy. Money markets continued to project the next Federal Reserve (Fed) rate cut only in mid-2026.
Meantime, the US Supreme Court didn’t rule on challenges to President Donald Trump’s tariffs on Wednesday, leaving the world to wait until at least next week to learn the fate of his signature economic policy.
See also: US stocks extend drop as data fails to convince on rate cut path
The S&P 500 fell 0.5%. Its equal-weighted version — which gives Dollar Tree Inc as much clout as Apple Inc — added 0.4%. The Nasdaq 100 slid 1.1%. The Russell 2000 rose 0.7%. The yield on 10-year Treasuries dropped four basis points to 4.14%. A dollar wavered. Bitcoin jumped about 3.5%.
Metals extended their dramatic start to the year — with gold, silver and copper hitting record highs. Oil fell after the close as Trump said he had been assured that Iran would stop killing protesters, in a signal he could hold off on a threatened military response to the repression of demonstrations.
Investors’ newfound affinity for companies that benefit most from an accelerating economy is in for a tough earnings test.
Robust forecasts will be needed to justify a rotation from tech that is notable after years that saw a handful of megacap AI firms do the heavy lifting. The Fed’s monetary easing has reopened the case for economically sensitive sectors at a time when traders are questioning the durability of the artificial intelligence trade, prompting money managers to diversify away from the bull market’s long-time winners.
Regardless of what happens with tech stocks in 2026, Clark Bellin at Bellwether Wealth says he expects the “broadening story” to play an even bigger role this year as the bull market grinds along.
“Ultimately, we see a bit more downside for the S&P 500, but there are plenty of opportunities on the long-side as this ‘rotation nation’ continues,” said Jonathan Krinsky at BTIG.
A “rotational” bull market is likely after three strong years of returns, currently rewarding investors willing to rotate “down-cap” into value leaders showing relative strength, noted Craig Johnson at Piper Sandler.
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After a four-year period of sideways trading, we’re finally seeing the Russell 2000 break out above multi-year resistance and attempt to make another leg higher, noted Bespoke Investment Group strategists.
The gauge has outperformed the S&P 500 since its closing low on Nov. 20, and Bespoke says the best sectors in small caps during this rally have been materials, industrials, consumer discretionary, and technology — all cyclicals.
One of the widest gaps recently between small and large-cap sector performance has been in technology, though. The average Russell 2000 tech stock has far outpaced the large-cap tech sector (cap-weighted) in the span.
“This is another example of the rally broadening out from the previously concentrated gains seen in mega-cap tech,” Bespoke said.
Optimism among clients of Goldman Sachs Group Inc. surged to the highest level in about a year, as confidence in global growth outweighed geopolitical and macroeconomic concerns.
Goldman’s Risk Appetite Indicator climbed to the highest since early 2025, placing it in the 96th percentile historically, data from the bank’s trading desk show. While elevated risk appetite is often seen as a sign that investors are growing over-exuberant, dynamic growth in the US and other regions may justify the bullish outlook this time around, according to Lee Coppersmith, managing director at Goldman Sachs.
A market stall would not be unexpected given the rally, as a pause is becoming commonplace during earnings season in recent quarters due to a combination of a rally coming into earnings, skepticism over the durability of the consumer and the AI trade, and the blackout period for share repurchases, according to Mark Hackett at Nationwide.
“That said, the balance of power remains squarely in the bulls’ favour given the economic strength, earnings acceleration, fiscal and monetary stimulus, and technical tailwinds,” he noted.
On the macro front, US retail sales rose in November by the most since July, fueled by a rebound in auto purchases and resilient holiday shopping. Wholesale inflation picked up slightly on a jump in energy costs, even as prices for services were unchanged.
“This data likely doesn’t change anything for the Fed, which ended up cutting rates back in December even without knowing this data,” said Bellin at Bellwether Wealth. “We expect the Fed to remain on hold for the next six months and then cut rates by one or two times in the second half of 2026.”
Economic activity picked up at a “slight to modest pace” in most parts of the US since mid-November, the Fed said in its Beige Book survey of regional contacts.
“This marks an improvement over the last three report cycles where a majority of districts reported little change,” the report said.
Uploaded by Isabelle Francis
