Another High For Small Caps

Good morning investors,

The Greenland crisis has faded into the rearview mirror as markets posted back to back gains, with the S&P 500 closing above 6,900 on Thursday. Yet the real story isn't the geopolitical noise that dominated headlines, it's the historic small cap outperformance validating my highest conviction call for 2026. The Russell 2000 has now outperformed the S&P 500 for 15 consecutive trading days, the longest streak in three decades, while surging 8.2% in the first three weeks of the year. That roughly triples the gains of the three other benchmark indices combined. This isn't just rotation, it's regime change to the unloved asset class.

Dow ($DIA ( ▲ 2.48% )) futures down 92 points, S&P ($SPY ( ▲ 1.92% )) futures off 0.1%, and Nasdaq ($QQQ ( ▲ 2.11% )) futures losing 0.2% as Intel's disappointing guidance drags on sentiment. The chipmaker tumbled 13% after hours despite beating Q4 expectations, with first-quarter revenue guidance of $11.7 billion to $12.7 billion coming in below the $12.51 billion consensus.

Oil prices rebounding with Brent up 1.1% to $64.77 after Trump warned that a U.S. "armada" is heading toward Iran, deepening concerns of potential military action in the Middle East. Gold settled at another record Thursday and is holding those gains despite risk assets recovering.

S&P Global PMIs and University of Michigan consumer sentiment data arrive this morning to close out the week's economic calendar.

After several years of investors flocking to mega cap multinational technology stocks, the rotation into interest rate sensitive, domestic focused companies has accelerated dramatically. The Russell 2000 ($IWM ( ▲ 3.59% )) closed at another record Thursday, and the decisive shift in the Russell 2000 to S&P 500 ratio signals a vote of confidence in the macro outlook, effectively pricing in durable economic growth.

A spike in this ratio suggests investors have moved off defensive positioning to seek returns in riskier, cyclical pockets. The Russell 2000 is one of the equity market's clearest barometers for confidence in the U.S. economy. It's made up of smaller firms, regional banks, and mid-market industrials that live and die on Main Street. These companies feel changes in borrowing costs faster, depend more heavily on domestic demand, and are less insulated from recessions compared to global mega caps.

For what it's worth, a bull market that broadens to small cap stocks has historically coincided with healthier market internals, not late-cycle exuberance. The message coming out of small caps remains clear: recession fears have evaporated, risk appetite is surging, and Wall Street expects a booming economy. With the Fed set to lower interest rates at least once more in the months ahead, the small cap party may just be getting started.

November's Personal Consumption Expenditures index showed prices rose 2.8% year over year, in line with expectations. But once again, investors and the Fed are confronted with a report that says very little given the data collection issues during the shutdown period.

The takeaway continues to feel copied and pasted: consumers are spending, inflation is stubborn, and questions about the path forward remain. The Fed can afford to wait for answers. We'll know more next week when the FOMC meets for its first rate-setting conference of the year, though markets widely expect rates to hold in the 3.5% to 3.75% range.

Intel beat Q4 expectations with adjusted EPS of $0.15 versus $0.08 expected and revenue of $13.7 billion versus $13.4 billion forecast. But the first-quarter guidance disappointed, with revenue of $11.7 billion to $12.7 billion and breakeven adjusted earnings versus expectations of $0.05 EPS on $12.51 billion.

CFO David Zinsner told CNBC the soft guidance was partially because the company lacks supply to meet seasonal demand, with improvement expected in Q2. CEO Lip-Bu Tan acknowledged yields are "still below what I want them to be" while noting the company is "working aggressively" to increase 18A supply to meet "strong customer demand."

The stock had rallied 147% over the past year on optimism around securing anchor customers for Intel's foundry business. Data Center and AI sales totaled $4.7 billion, up 9% year-over-year, while Client Computing Group declined 7% to $8.2 billion. The investments from the U.S. government, SoftBank, and Nvidia created elevated expectations that the company struggled to meet with its guidance.

Capital One announced it's acquiring payments startup Brex for $5.15 billion, a 50-50 cash and stock deal representing more than a 50% decline from Brex's $12.3 billion valuation in 2023. The acquisition follows CEO Richard Fairbank's $35 billion Discover Financial purchase last year.

Brex pioneered the melding of corporate cards, banking, and spend management software, servicing firms including Robinhood, Zoom, and Anthropic. Capital One became convinced that Brex's model would be the winning offering in business payments. The valuation decline shows the headwinds even successful fintech companies have encountered since the low interest rate era ended.

Amazon is planning a second round of job cuts next week as part of its broader goal of trimming 30,000 corporate workers, affecting AWS, retail, Prime Video, and HR units. The full cuts would represent nearly 10% of corporate workforce.

Citigroup expects more layoffs in March following about 1,000 cuts this month, likely affecting managing directors and senior employees as CEO Jane Fraser continues her turnaround plan.

Intuitive Surgical beat estimates with adjusted EPS of $2.53 versus $2.26 expected and revenue of $2.87 billion versus $2.75 billion forecast. Da Vinci procedure volumes rose 18% globally, demonstrating continued adoption of robotic surgery.

GE Aerospace's strong results yesterday reinforced the aerospace services theme, with airlines prioritizing maintenance spending amid aircraft supply constraints.

Netflix co-CEO Greg Peters said the company is on track to win Warner Bros. Discovery shareholder backing for its $82.7 billion offer, adding that Paramount's rival bid "doesn't pass the sniff test." Only a "very small" number of WBD shares have been tendered to Paramount's hostile offer.

With yesterday's bounce, Navitas Semiconductor is back on my watchlist. I called this out previously and continued to do so as the stock fell hard in December. I have held this stock for a while for full transparency.

The investment thesis centers on the company's strategic pivot to high power, high margin markets like AI data centers and industrial electrification. NVTS's unique GaN and SiC technology platform positions it as a key enabler for next-generation power architectures, with early adoption in Nvidia's 800V AI factory ecosystem.

The company's robust $150 million cash balance and zero debt support aggressive R&D during a deliberate revenue trough and business reset. Despite premium valuation multiples, anticipated 50%+ annual growth suggests long-term upside if execution remains strong. Navitas sits right at the center of AI's exploding power needs and the global drive for energy efficiency.

Trump's warning about a U.S. "armada" heading toward Iran alongside the ongoing civil unrest, which has claimed over 5,000 lives according to human rights groups, has put energy markets on edge. Iran produces over 3 million barrels daily as an OPEC member, and any supply disruption would impact global markets.

I'm a new owner of Baker Hughes, which I've discussed in recent newsletters. Any spike in oil should give the company a boost, while the stock has already broken out of resistance and is moving to the upside. The energy services space offers compelling risk-reward with geopolitical uncertainty providing potential catalysts.

Thursday's gains erased the Dow's losses from earlier in the week, leaving it up marginally. However, the S&P 500 and Nasdaq are on track for their second consecutive negative week, down 0.4% and 0.3% respectively. The divergence between large cap weakness and small cap strength tells the real story of market internals.

Gold holding its gains despite risk assets recovering is notable. As one strategist observed, gold is maintaining most of its recent run "amid increasing bouts of geopolitical uncertainty, concerns over the long-term trajectory of U.S. public finances, and increasing political pressure on the Federal Reserve." I think gold can perform well this year, but I think there are better opportunities from here.

The small cap breakout deserves full attention. The Russell 2000's 15-day outperformance streak against the S&P 500, the longest in three decades, isn't a statistical quirk. It's the market voting with capital on the economic outlook. These companies are domestic focused, interest rate sensitive, and Main Street dependent. Their collective surge represents confidence that recession fears have evaporated and that broader economic growth is durable.

The tariff playbook delivered exactly as expected this week. Tuesday's panic became Wednesday's relief rally, and those who bought the dip were rewarded by Thursday's close. Trump views the stock market as his scoreboard, and his Davos comments about the Dow reaching 50,000 suggest limited tolerance for sustained declines.

Next week brings the Fed's first meeting of the year and a massive earnings slate including Apple, Microsoft, Meta, and Tesla. Four of the Magnificent Seven reporting in one week will provide substantial data on AI infrastructure spending, consumer demand, and corporate guidance. The fundamental picture will come into sharper focus.

For now, the broadening thesis remains the dominant theme. Small caps leading, cyclicals outperforming, and market internals signaling health rather than late-cycle exuberance. Use any pullbacks as opportunities to add exposure to domestic-focused, rate-sensitive names benefiting from this regime change.

Have a great weekend.

As always, feel free to reach out with questions about positioning.

Dan Sheehan

[email protected]

This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.