Markets are acting differently in early 2026. Small-cap stocks are up, and tech is starting to lag. It’s a sharp change from last year when the big tech names carried almost everything. Investors are noticing.
Michael Arone from State Street says the rotation started late last year and gained momentum in recent weeks. Earnings, policy moves, and a surprisingly strong economy are all playing a part.
Small-Caps Take the Lead
Large-cap stocks ended 2025 on a high. They had nearly 20% gains, much higher than smaller firms. But now the trend is shifting. Small-caps are up over 5% so far, while large caps are mostly flat.
This is not just a one-off. Small companies are performing across both growth and value indexes. That suggests investors are spreading money more broadly.
Earnings Growth Drives Change
Earnings are a major factor behind the rotation. For the last couple of years, profits were concentrated in a handful of mega-cap tech names. That gap is closing.
Lower interest rates are helping smaller firms, especially those that rely on borrowing. Fiscal support also matters. Businesses focused on domestic demand are seeing stronger cash flows. As earnings growth spreads, investors are starting to look outside the biggest names.
Real Assets Get Attention
Geopolitical events are also pushing investors toward real assets. Metals, mining, and materials are performing well. These sectors are quietly leading the market in early 2026.
It shows that some investors are trying to diversify. They don’t want all their exposure in a few tech stocks anymore.
Tech Loses Some Momentum
Tech is still important, but the sector is weaker this year. The AI boom helped it in 2025, but early 2026 has been rough.
That does not mean the sector is in trouble. Companies like Taiwan Semiconductor are reporting strong earnings. But investors are moving money into areas where earnings growth is catching up.
Financials Feel Policy Pressure
Banks have struggled early in 2026. Proposed caps on credit card interest rates created uncertainty. That weighed on the sector, even as the broader market remained steady.
Strong earnings from big banks recently suggest some of the worry may have been overblown. The sector could recover if fundamentals hold.
Rotation Could Continue
For the shift to last, the economy has to stay strong. Fiscal support should remain in place. Interest rates probably need to stay steady. Right now, those conditions are mostly met.
The economy continues to grow faster than expected. That helps small-cap and non-tech companies gain ground.
Broadening Leadership Is Healthy
The main point is that this is not a tech sell-off. It’s a broadening of the market. Small-cap and non-tech stocks are catching up.
If earnings continue to improve outside the big names, the market may stay more balanced. For investors, this makes diversification important again after a long stretch when a handful of tech stocks drove the market.
