Looking at the raw numbers, the S&P 500 Index was down last week, but if you look at the same index with the components weighted equally, not weighed by market-cap, the S&P rose by 0.78%, so the average stock in the S&P 500 Index (Equal Weight) was up while the index itself was marginally down, because the same trends we observed in the first week of 2026 continued last week.
The differential between the S&P 500 Equal Weight Index and the S&P 500 has been gargantuan in the last two weeks. I certainly do not believe this rotation will continue at the same rate, but it is likely to happen in fits and starts throughout the year. While value and small-caps can outperform the technology sector, I do not believe it is possible for the technology sector to go down while value and small-caps head higher.
The technology sector going down hard means only one thing – the whole market gets pulled lower, simply due to the heavy weighting of the technology sector in the stock market, which is by far the largest, pushing 40%, if you include some major technology stocks being categorized differently (like electric cars).
The more extreme version of this rotation is represented by the Russell 2000 Index, the first index one thinks of when discussing small caps. Russell had another solid up week (2.1%). This index is slated to have a great year, in which the faster GDP growth targeted by the Trump administration is likely to be a big support. If we get the seemingly contradictory environment of faster and lower interest rates, I would not be surprised to see the Russell 2000 surge 50% in 2026. The index has seen a massive multi-year underperformance before, and the environment is ripe for such a move once again.
The whole index is a tad over $3 trillion in market cap – a rounding error when it comes to the economy. It is smaller in value than several individual mega-caps in the Magnificent 7, and when it comes to stock picking, it is a problematic index. Small-cap stocks with great but underfollowed fundamentals can literally stay flat for six-months and then deliver an explosive move, and vice versa. Small-cap portfolios are notoriously less correlated to the small-cap index than large-cap portfolios, so if you want to play the small-cap market, you may be better off with index funds and broad ETFs on the index, in my view.
