Small Caps Surge as Market Rotation Accelerates | Weekly Market Recap Jan 16, 2026

Markets delivered a mixed but telling message this week. The Russell 2000 notched another all-time high, while both the S&P 500 and Nasdaq briefly tested highs before ending the week essentially flat. Year-to-date, the divergence is becoming harder to ignore: small caps are up roughly 8%, while the S&P 500 and Nasdaq are each hovering around 1%.

This is not random noise. This is what rotation looks like.

Why Small Caps Are Outpacing the S&P 500 and Nasdaq

The S&P 500 has become increasingly top-heavy. Roughly 30% of the index is concentrated in just seven stocks: Meta, Microsoft, Amazon, Nvidia, Alphabet, Apple, and Tesla. The Nasdaq is even more sensitive to their movements.

When these companies stall or correct, the entire index feels it, even if hundreds of other companies are performing well underneath the surface.

That is exactly what we are seeing now.

Over the past several weeks, several of the Magnificent Seven stocks have been under pressure. That selling has suppressed headline index returns, while capital quietly rotates into small caps and the remaining 493 companies in the S&P 500.

We highlighted this possibility in last weeks Weekly Update. The market is now confirming it.

Earnings Growth Is Driving the Rotation

One of the most important, and often overlooked, drivers of this move is income growth expectations.

Going into Q1, projections showed:

• Decelerating sales growth for Mag 7 stocks

• Accelerating average sales growth for the other 493 companies in the S&P 500

• Improving growth expectations for Russell 2000 small caps

As growth expectations rebalance, so does capital. Investors are paying up for diversification and forward growth rather than crowding into the same names that dominated the last cycle.

This does not signal a crash. It signals normalization.

Market Breadth Is Quietly Improving

Another encouraging development is market breadth.

Our data shows that over the past month there has been a greater than 15% increase in the number of stocks trading above their 20, 50, and 200 day moving averages. In plain English, more companies are participating in the upside.

This is typically a healthy sign for markets. Broad participation tends to support sustainability, even when headline indexes appear stagnant.

Beyond Stocks: Precious Metals Remain a Core Holding

Outside of equities, we continue to hold positions in gold and several industrial and precious metals, including silver, copper, palladium, and platinum.

We have maintained this stance since July, and the bullish tailwinds remain intact. Weakening dollar, global supply constraints, and ongoing central bank demand continue to support this space. For the foreseeable quarter, we see no reason to abandon exposure.

Bullish Conditions Raise an Important Question

All of this is constructive. Equities are healthy. Market participation is broadening. Precious metals remain supported.

But the most important question is not whether markets can go higher.

It is whether your plan can withstand the inevitable periods when they do not.

Does your strategy allow for drawdowns without disrupting your retirement income? Have you already locked in fixed interest rates or guaranteed income streams, or is everything still dependent on market conditions staying favorable?

Strong markets create opportunity, but they are also the best time to prepare for uncertainty.

If you have not yet modeled how guaranteed income could fit into your overall plan, now is a good moment to be proactive rather than reactive. You can explore this further using our Guaranteed Income Calculator and see how stability can complement growth.

Final Thoughts

Rotation does not mean risk is rising. In many cases, it means risk is redistributing. The current environment favors balance, diversification, and planning beyond just index performance.

Enjoy the upside, but make sure your plan is built to endure the full cycle.

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