Market Rotation 2026: New Leaders Emerge

S&P 500 Rotation: Why Small-Cap Stocks Are Poised for a Surge in 2026

A divergence is emerging in the stock market,with equal-weight S&P 500 performance significantly outpacing the traditional market-cap weighted index,signaling a potential shift in investor sentiment and a coming year of prospect for smaller companies.

Despite a marginal decline in the broader S&P 500 last week, an equal-weighted version of the index-where each company holds the same proportion irrespective of size-actually rose by 0.78%. This indicates that the average stock within the S&P 500 is performing well, even as the largest companies weigh down the overall index.

Did you know? – The S&P 500 Equal Weight Index gives each of the 500 companies a 0.2% weighting, regardless of market capitalization. This differs from the standard index, where weighting is based on company size.

The Growing Divide Between Large and Small Caps

The gap between the S&P 500 Equal Weight Index and the standard S&P 500 has become “gargantuan” over the past two weeks, according to analysts. This suggests a rotation is underway, with investors increasingly favoring smaller companies and value stocks over the dominant technology sector. While this shift isn’t expected to continue at the current pace, its likely to persist “in fits and starts” throughout the year.

“While value and small-caps can outperform the technology sector,I do not believe it is indeed possible for the technology sector to go down while value and small-caps head higher,” one analyst noted,highlighting the interconnectedness of the market. A significant downturn in the technology sector-which currently accounts for roughly 40% of the stock market, including companies categorized as electric vehicle manufacturers-would inevitably drag down the entire market.

Pro tip – Diversification is key when investing in small-cap stocks.Due to their volatility, spreading investments across multiple companies can help mitigate risk.

The Russell 2000: A Leading Indicator

The Russell 2000 Index, a benchmark for small-cap stocks, is at the forefront of this rotation. The index experienced a strong week, climbing 2.1%, and is predicted to have a strong 2026. This optimism is fueled by expectations of faster GDP growth under the Trump administration and the possibility of a unique economic environment characterized by both accelerating growth and stable, or even declining, interest rates.

Under these conditions, some experts predict the russell 2000 could surge by as much as 50% in 2026. “The index has seen a massive multi-year underperformance before, and the environment is ripe for such a move once again,” a senior official stated.

Reader question – What factors, beyond GDP growth and interest rates, do you think could significantly impact the performance of small-cap stocks in the coming years? Share your thoughts!

navigating the Small-Cap Landscape

Despite its potential, the Russell 2000, with a market capitalization of just over $3 trillion, remains relatively small compared to the overall economy and even individual mega-cap companies within the “Magnificent 7.” This makes stock picking within the index notably challenging.

Small-cap stocks can experience prolonged periods of stagnation followed by sudden, explosive growth-or the reverse. Furthermore, small-cap portfolios tend to be less correlated to the index itself than large-cap portfolios. Therefore, one analyst suggests that investors seeking exposure to the small-cap market may be better served by investing in broad index funds and exchange-traded funds (ETFs) rather than attempting to select individual stocks.

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