Technology stocks were all the rage last year… until September, when most of the big-cap AI-driven players saw share prices stall. The shift was quiet, yet painful. High-flyers like Nvidia and Palantir have made little progress since then, falling as the S&P 500 broadened to include the 493 stocks not in the so-called magnificent seven.
The broadening beyond technology stocks has continued into January and is most evident in the eye-popping gains of the Russell 2000 small-cap index. While the S&P 500 is flat year-to-date because of weakness in technology stocks, the Russell 2000, or R2K to those who have been around a while, is up 9.5%—a relatively remarkable return for such a short period.
The gains in small caps relative to the S&P 500 rest on the fact that, unlike the S&P 500, which is heavily tilted toward tech, the R2K is far more balanced, with industrials, financials, and healthcare making up over 50% of the index.
Whether small-cap stocks can maintain their lead over large-cap counterparts may depend heavily on developments on the geopolitical front.
The surprise tariffs announced by President Trump last weekend were reversed in Davos, Switzerland, at the World Economic Forum, when Trump alluded to a “forever deal” that presumably allows the U.S. unfettered access to build the Golden Dome defense system.
In the wake of the President’s U-turn, battered tech stocks rallied, raising questions about whether investors are better off bargain-hunting in recently out-of-favor tech darlings like Nvidia and Palantir or sticking with small-cap stocks.
President Trump’s reversal on Greenland tariffs sent technology stocks like Nvidia and Palantir higher this week.
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Small caps ride a tidal wave of demand as tech loses luster
The shift away from technology stocks last fall happened quietly. Nobody rang a bell signaling it was time to rethink portfolios. Instead, growing concern over valuation and peak AI spending led investors, one by one, to book some gains into year’s end, providing valuable cash to reinvest in underperformers likely to do better when tech lags, particularly healthcare and energy — two baskets of stocks that do best in the late stage of the business cycle.
Related: Cathie Wood quietly buys $7.27 million of popular tech stock
Since September, the SPDR Healthcare ETF (XLV) and SPDR Energy ETF (XLE) have been up 13.8% and 9.5% respectively, versus 3.4% for the tech-heavy S&P 500. The gains have been particularly strong in small-cap energy and healthcare. Biotech stocks, a key component within the small-cap index, and energy service stocks, key to helping major oil firms find and drill wells successfully, have been standout performers.
The SPDR S&P Biotech ETF (XBI) is up 31.3%, while the SPDR Oil & Gas Equipment & Services ETF (XES) is up 33.1%.
To put those gains in perspective, the Roundhill Magnificent Seven ETF (MAGS), comprised of the biggest-of-the-big in tech, is essentially unchanged.
Small-cap stocks’ gains mirror history
The strength in small caps isn’t too surprising to those who follow history closely. When I built my quantitative system for portfolio manager clients in 2003, I incorporated seasonality to account for typical seasonal patterns in specific stocks and sectors.
While the past doesn’t guarantee the future, it has an uncanny knack for identifying repeatable trends, one of the best known of which is the January Effect, long heralded by the Stock Trader’s Almanac.
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The January Effect holds that small-cap stocks tend to outperform large-cap rivals in mid-December, generating excess returns through February.
According to Almanac editor-in-chief Jeffrey Hirsch, small caps typically outperform large caps, returning 4.9% from mid-December through February since 1979 compared to 2.6% for the large-cap Russell 1000.
“In a typical year, the smaller fry stay on the sidelines while the big boys are on the field. Then, around early November, small cap stocks begin to wake up, and in mid-December they take off,” wrote Hirsh in the 2026 Stock Trader’s Almanac. “Small caps tend to hold the lead through early June, though the bulk of the move is usually complete by early March.”
What’s next for small caps may depend on how tech reacts to Greenland reversal
Small-cap gains are tied partly to the exodus from tech stocks, including Nvidia and Palantir. If those stocks start to rally again, they could prompt investors to go risk-on with tech, selling small caps to free up money to buy back the shares they sold late last year.
Much may depend on how technology earnings shake out.
Nvidia is scheduled to report its fiscal year results on February 12. Wall Street analysts expect good things, with Q4 revenue and EPS estimates of $65.6 billion and $1.52, indicating 66.7% and 71% year-over-year growth.
Palantir‘s results will come sooner, on February 2. Analysts are similarly bullish on its prospects. Revenue in the fourth quarter is expected to be $1.34 billion, up 62% year over year, while EPS estimates are 23 cents, up 64%.
Even sooner than that, though, we’ll hear quarterly earnings results from hyperscalers, and what they say about their capex plans for 2026 will be key to determining whether animal spirits get unleashed again in technology.
Goldman Sachs expects the big hyperscalers will spend $527 billion in 2026, up from $394 billion in 2025. Any rerating of that spending outlook higher could have major implications for how much investors are willing to pay up to own the likes of Nvidia and Palantir again.
Key quarterly earnings dates for big cap tech:
- Meta Platforms: January 28
- Microsoft: January 28
- Apple: January 29
- Amazon: January 29
- Palantir: February 2
- Alphabet: February 4
- Nvidia: February 12
Source: MarketSurge by IBD.
In short, everything is related, making the Russell 2000, Nvidia, and Palantir perhaps the most important stocks to track over the coming month now that geopolitical worries have calmed again.
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