Rotation

Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

• DJIA 52-wk: +13.50% | YTD: +2.70% | Wkly: -0.29%
• S&P 500 52-wk: +15.73% | YTD: +1.38% | Wkly: -0.38%
• NASDAQ 52-wk: +19.79% | YTD: +1.18% | Wkly: -0.66%
• Russell 2000 Index 52-wk: +17.66% | YTD: +7.89% | Wkly: +2.04%

Key Takeaways

• Modest weekly pullback: Major U.S. indexes finished slightly lower for the week after early gains. (Market beat)
• Small caps outperform: Smaller companies bucked the downtrend with relative strength. (WSJ)
• Mixed sentiments: A blend of earnings news, economic signals, and political/ Fed commentary kept markets choppy. (Investopedia)
• Year-to-date holding positive: Despite the weekly slide, major benchmarks remained above January’s starting levels. (Market beat)

Treasury Yields & Rates

· Treasury yields climbed to multitooth highs at times, pressuring equities and signalling cautious risk sentiment for rate-sensitive sectors.

Strengths & Winners

• Small-cap stocks were a standout, hitting new highs and driving the Russell 2000’s weekly gain — a sign of breadth beyond large tech names. (WSJ)
• Some defensive sectors (utilities, industrials, materials) and commodities saw relative strength in broader market performance data. (Investopedia)

SEMI STOCKS ARE STRONG:

On Friday, Technology stocks the strongest forces behind the market’s moves. Broadcom rose 2.5% and MU rose 7.8%. The demi companies are among several Big Tech companies with outsized valuations that often push the market higher or lower.

Meta Triples Down on AI. It Could Be a Wild Ride for the Stock:

Meta Platforms META -0.09% CEO Mark Zuckerberg has never shied away from big moves, from dropping out of Harvard University to work on a fledgling social-media company to changing the name of that company even after it crossed $100 billion in annual sales. This week, he may have signaled his largest move yet—a massive multiyear program, probably in excess of a trillion dollars, to build a global network of artificial-intelligence data centers. A trillion dollars is a lot of money, even more than Meta’s Facebook and Instagram can provide, so the company also hired a banker as its new president and vice chairman.

At this moment, no one is more all-in on AI than Meta.

“Today, we’re establishing a new top-level initiative called Meta Compute,” Zuckerberg said in a Monday Facebook post. “Meta is planning to build tens of gigawatts this decade, and hundreds of gigawatts or more over time. How we engineer, invest, and partner to build this infrastructure will become a strategic advantage.”

Investors have already been grappling with Meta’s AI ambitions. Now they have no choice but to embrace the business as AI-first.

Meta spent about $70 billion on AI data centers in 2025, up from $37 billion the year before. And now that looks like only the beginning. Even Meta’s substantial operational cash flows—over $100 billion in the past 12 months—will be insufficient to fund the efforts.

A gigawatt AI data-center complex costs about $50 billion if it uses Nvidia NVDA -0.44% hardware, less when using AI chips from other companies. And facilities that large can’t just hook into the electric grid for a gigawatt of power all day, every day, so new data-center designs often include an on-site power plant, adding to capital costs.

That’s for one gigawatt. Zuckerberg is talking about 20 times that or more by the end of the decade.

Last year, Meta sold $30 billion in bonds, and took a minority position in a joint venture that keeps its $27 billion Louisiana data-center complex off its balance sheet.

Meta Compute will have its own banker to finance this ambition, after the company named Dina Powell McCormick as its president and vice chairman this past week. McCormick comes from the worlds of international finance and politics. She worked in national security roles in two Republican administrations, and spent 16 years in senior leadership at investment bank Goldman Sachs. She is married to Dave McCormick, the junior U.S. senator from Pennsylvania.

Dina McCormick will work on “partnering with governments and sovereigns to build, deploy, invest in, and finance Meta’s infrastructure,” according to Zuckerberg.

The call-out to sovereigns is important here. The monarchies in the Kingdom of Saudi Arabia and the United Arab Emirates have shown great interest in AI data-center investment. McCormick was born in Egypt, coming to the U.S. as a child, and she still speaks Arabic. Much of her work in Washington and on Wall Street has focused on the region.

If you wanted to start raising large amounts of capital from the clients of investment banks and Middle Eastern sovereign-wealth funds, while at the same time smoothing AI regulatory processes already under way globally, McCormick is the person to hire. The president role has been vacant since 2012, when Zuckerberg gave it up. (Zuckerberg’s longtime lieutenant Sheryl Sandberg had the title of chief operating officer before she left in 2022.)

Zuckerberg’s bet is that AI personal assistants will eventually surf the web instead of humans, so Meta has to invest now to convert those billions of social-media users into Meta AI users.

“If we end up misspending a couple of hundred billion dollars, I think that that is going to be very unfortunate, obviously,” Zuckerberg said in a September podcast. “But what I’d say is I actually think the risk is higher on the other side.”

This is Mark Zuckerberg, the paranoid visionary who is always on the lookout for the next thing that could disrupt Meta. But there is another side to the executive: the pragmatic protector of the stock price.

In 2021, Zuckerberg went all-in on another transformation: the metaverse. Zuckerberg’s vision was that people would spend part of their day working, playing, and hanging out in three-dimensional virtual environments using the company’s Quest virtual-reality headsets. He even changed the company’s name from Facebook to reflect the new direction.

“From now on, we will be metaverse-first, not Facebook-first,” Zuckerberg said in explaining the change.

But the rollout was subpar, at best. Meta’s Quest headsets were still clunky, and the software looked half-baked. The virtual worlds were nearly empty. The metaverse may be something in our future, but neither the hardware nor the software was ready in 2022.

In the year after the name change was announced, Meta stock fell 69%. Then came the launch of ChatGPT, and Zuckerberg talked less about the metaverse and more about efficiency, before turning his full attention to AI. The stock soared 194% in 2023 and another 65% in 2024.

Last year brought an acceleration in the company’s AI data-center buildout—and a plateau for the stock, as investors began to wonder about the payoff on all of the AI spending. Meta shares underperformed the S&P 500 index SPX -0.06% in the second half of last year.

With the announcements this past week, the stock fell another 4.9%. If it keeps going, the pragmatic stock-price protector may decide to slow down on new investments.

The big difference this time is the scale. The Reality Labs segment that worked on the metaverse lost $71 billion over nearly five years. Meta spent about that on AI data centers in 2025 alone, and much more is in the works. A reversal on AI would be much harder—and far more costly.

Russell 2000 Outperformance & Trend

Strong Relative Performance

• The Russell 2000 — the benchmark for U.S. small-cap stocks — has been outperforming major indexes, often beating the S&P 500 for multiple trading sessions in a row and finishing the week at or near record highs. WSJ
• This marks one of the longest streaks of outperformance vs. the S&P 500 since 2008, indicating real rotation into smaller companies. WSJ

Weekly Performance Snapshot

• According to LPL Research’s weekly market data, the Russell 2000 rose roughly ~2.2% in the week ending January 16, 2026, significantly outperforming larger benchmarks like the S&P 500. LPLFI

Drivers of Small-Cap Strength

• Rotation from mega-caps: Investors have been shifting capital out of large tech and growth names into smaller, economically sensitive stocks. WSJ
• Economic optimism: Strength in several small-cap sectors reflects confidence in growth drivers like industrials, retail, and materials. WSJ

Context & Broader Themes

Why Small Caps Are Getting Attention

• Small caps often do better when economic growth expectations rise — they are more domestically oriented and benefit from strong consumer and business spending. MarketWatch
• There appears to be increased breadth in the market as many smaller-company stocks participate in gains rather than only a few large tech names driving performance. MarketWatch

Year-to-Date Trends

• The Russell 2000’s year-to-date gains have been even stronger than weekly metrics, suggesting a broader upswing in small-cap sentiment relative to larger indexes. WSJ

Risks & Considerations

Volatility & Fundamentals

• Small caps are typically more volatile and sensitive to credit conditions; many companies in the Russell 2000 have weaker balance sheets or are not yet profitable, adding risk despite strong index performance. AInvest
• Liquidity and earnings consistency can vary widely across small companies, meaning index strength may mask individual stock risk. AInvest

Macro & Rate Sensitivity

• Small caps often benefit from lower interest rates but can be hurt if rates rise or inflation remains stubborn — conditions that can tighten borrowing costs for smaller businesses.

Summary

Russell 2000 strong performance: Outperformed broader indexes and clocked one of its longest winning streaks vs. the S&P 500 in years. WSJ
Weekly gains: Roughly +2% for the week of Jan 12–16, 2026. LPL FI
Market rotation: Money flowing out of mega-cap tech into smaller, cyclical names.
Higher risk profile: More volatility and varied fundamentals make small caps riskier than large-cap peers. WSJ

Sector Themes Leading the Russell 2000 Rally

Cyclical & Economic Sensitive Sectors (Strong Drivers)

Small caps tied to the broader economy and domestic demand have been attracting investor flows:

1. Regional Banks & Financials

• Banks in the small-cap space have benefited from a steeper yield curve and improved lending activity, lifting regional lenders more than larger financials.
• Names like KeyCorp and Huntington Bancshares have been cited as leaders in this trend (in broader small-cap rotation context). RICentral

2. Industrials / Onshoring & Infrastructure

• Industrial small caps tied to manufacturing and infrastructure growth — such as aerospace contractors and machine builders — are drawing buying as the economy shows strength.
• Companies like Rocket Lab (space infrastructure) and NuScale Power (nuclear/energy infrastructure) illustrate how niche industrials are participating. RICentral

3. Cyclicals & Domestic Services

• Broader cyclical categories — including specialty retail, building materials, and business services — are outperforming as economic optimism rises. CapWolf

Sector Rotation & Market Breadth

• The Russell 2000 has outperformed the S&P 500 for multiple days straight — marking its longest such streak since 2008 — as money rotates out of concentrated mega-cap growth and into broader small-cap names. Fintool
• This rotation isn’t limited to one industry; it includes financials, industrials, consumer cyclical, and select growth segments, indicating broader participation. CapWolf

Notable Small-Cap Stocks Gaining Attention

While performance can vary by source, multiple recent market notes highlight small caps with strong momentum or interest from investors:

High-Performing Small Caps & Picks

• Biotech standouts: Some biotech small caps with strong clinical catalysts are posting very high year-to-date gains. Financial Content
• Example: Galectin Therapeutics (GALT) — up sharply on clinical progress.
• Space / Aerospace names: RICentral
• Rocket Lab (RKLB) seeing valuation support from government contracts in infrastructure and space tech. RICentral
• Regional banking beneficiaries:
• KeyCorp (KEY) and Huntington Bancshares (HBAN) — gaining from increased loan demand and credit trends. RICentral

Broader Small-Cap Lists & Ideas

In addition to individual names above, some recent lists of small caps trading at 52-week highs show strong performance across industries including industrials and specialty chemicals:

• Examples include names like OSK (Oshkosh Corp), AG (AGCO), and FLS (Flowserve) among others. Trefis

What This Means for Small-Cap Performance

Why the Russell 2000 is Leading

• Diversification away from mega caps: Heavy rotation from large, expensive tech stocks toward smaller, economically sensitive businesses.
• Improved economic data & sentiment: Boosting stocks tied to domestic growth and cyclicals. Fintool

Risks to Watch

• Small caps are generally more volatile and debt sensitive — strong sentiment can reverse quickly if economic data or rate expectations shift.

Individual names often diverge widely from the index, so selection matters more than broad index exposure. CapWolf

1. Follow-Through or Fade in Small Caps

2. Rotation Signals Matter More Than Index Levels

• The market has been rotating out of mega-cap growth and into cyclicals and domestically focused names.
• Watch whether:
• Industrials, financials, and materials continue to attract capital, or

• Money rotates back into large-cap tech and defensives.

3. Earnings Season Expands

• Bank earnings opened the door — next week broadens to:
• Industrials

• Consumer cyclicals

• Select tech
• Guidance will matter more than headline EPS.
• Markets will reward visibility and margin stability, not just beats.

4) Thursday- PCE for October

5) Friday – PMI

The NYSE advance/decline line made a record high on January 13. Although the MAG 7 names are somewhat lagging, the foundation of the market is getting stronger with this rotation. It’s hard to bet against this.

— Richie

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