Good morning investors,
I hope all my readers have had a great start to the new year. Tech stocks surge to kick off 2026 with Nasdaq futures up 1% as AI momentum carries forward, while Tesla previews disappointing Q4 deliveries with company-compiled consensus showing 422,850 units versus Bloomberg's 445,000 estimate. The S&P 500 looks to break a three year losing streak on the first trading day, historically finishing positive 48% of the time since the 1950s. Small caps position for potential outperformance as rate cuts loom in the year ahead, as the Russell 2000 historically gains 36% in the 12 months following the last cut in an easing cycle.
Opening Bell: Tech Leads 2026
Dow ($DIA ( ▲ 0.12% )) futures up 192 points, S&P ($SPY ( ▲ 0.07% )) futures gain 0.6%, and Nasdaq ($QQQ ( ▲ 0.21% )) futures pop 1% as tech looks to reassert leadership. Nvidia rises over 1% premarket while Palantir advances 2%, building on 2025's 39% and 135% respective gains. Apple, Alphabet, and Microsoft all trade higher.
This could reverse the first day curse of recent years where the S&P fell to start 2022, 2023, and 2024.
Tesla's Delivery Warning
Tesla's unprecedented move posting its own consensus estimates suggests management wants to control the narrative around weak Q4 deliveries. The company's 422,850 unit consensus represents a 15% year over year decline, below Bloomberg's 445,000 estimate showing only 10% drop.
The loss of the $7,500 EV tax credit explains domestic weakness with Kelley Blue Book estimating US sales fell 22.4% to 125,900 units. Full year consensus of 1,640,752 deliveries marks an 8% decline and second consecutive annual drop, which makes some investors question the 200+ forward P/E ratio.
Yet Tesla stock rises 2% premarket, suggesting investors look past delivery numbers toward AI and robotics potential. The disconnect between fundamentals and valuation grows wider as narrative overwhelms numbers.
The debate continues on Telsa being a car company or a robotics / AI company.
January's Historical Edge
January delivers positive returns approximately 60% of the time since 1993, averaging 0.9-1.2% gains for the S&P 500. While the "January Effect" of small-cap outperformance has weakened, the month still ranks among the top performing periods historically.
The January Barometer, "as goes January, so goes the year", shows compelling accuracy. When January finishes positive, the full year gains are positive 82-86% of the time with average returns of 16-17%. Negative Januarys predict full year losses only 50-54% of the time, essentially a coin flip.
This 75-77% directional accuracy seems impressive until recognizing stocks rise 73% of years regardless. Still, a positive January provides psychological momentum that often becomes self-fulfilling.
Small Caps' Rate Cut Opportunity
My 2026 outlook highlighted small cap potential, and historical data overwhelmingly validates this thesis. Following the last rate cut in easing cycles since 1984, the Russell 2000 ($IWM ( ▲ 1.32% )) averaged 36% gains over 12 months and 42% over 24 months versus its long-term 9-11% annual average.
During the 1990 cycle, small caps surged 44% in the subsequent year. The 2001 easing saw Russell 2000 gain 47% from cycle lows. Even the 2019 mid-cycle adjustment delivered 25% small cap returns over the following twelve months.
The relative performance proves even more compelling. In five rate cutting cycles since 1995, small caps outperformed large caps by an average of 12 percentage points annually. During non-recessionary easing periods (soft landings), the Russell 2000 beat the S&P 500 by 18 percentage points on average. When examining 3 month Treasury rate declines since 1954 using Fama-French factors, small caps outperformed in 74% of subsequent 6 month periods and 81% of 12 month periods.
Small caps' higher debt loads create this outperformance, as the Russell 2000 companies carry debt to equity ratios averaging 1.2x versus 0.8x for S&P 500 constituents. With 42% of Russell 2000 debt floating rate versus just 18% for large caps, each 25 basis point cut adds approximately 0.7% to small cap earnings versus 0.3% for large caps. Historically, during easing cycles, small cap earnings growth accelerated by 23% on average while large cap earnings grew just 11%.
2026 Market Outlook
Deutsche Bank strategists captured 2025 perfectly: "Strong year overall thanks to continued economic growth, optimism around AI, and more central bank rate cuts. However, headline gains masked huge volatility, particularly in April when Liberation Day tariff announcements sparked the 5th biggest two day slump for S&P 500 since WWII."
The CNBC Market Strategist Survey shows average 2026 S&P target of 7,629, implying 11.4% upside. My 10% projection with 10-20% volatility aligns with consensus while acknowledging midterm election dynamics create choppier paths.
Wall Street's near unanimous bullishness concerns me slightly, crowded optimism often precedes corrections. Yet underlying fundamentals support continued gains: 15% earnings growth expectations, AI productivity gains materializing, and Fed accommodation despite sticky inflation.
Sector Rotation Signals
Tech's premarket strength suggests rotation back from value to growth after December's defensive tilt. The equal-weight consumer staples hitting record lows versus equal-weight S&P 500 confirms risk appetite remains robust, exactly what healthy bull markets display.
This internal rotation beneath calm index surfaces provides opportunity. Winners rotate monthly but the broader advance continues. Nimble investors capitalizing on these shifts outperform passive indexing.
Key Themes for January
Watch for small cap breakout as rate cut expectations build. The Russell 2000 lagged in 2025 but a mean reversion could suggest catch up potential. Focus on quality small caps with pricing power and manageable debt loads. Normally the best play for small caps is the average.
International markets offer compelling value with European P/E multiples at substantial discounts to U.S. levels. The dollar's strength created headwinds in 2025 that could reverse if Fed easing accelerates.
AI implementation moves beyond infrastructure to applications. Companies demonstrating real productivity gains and revenue acceleration from AI adoption will outperform conceptual plays.
Final Thought
Starting 2026 with tech leadership and small cap potential creates interesting dynamics. The market's resilience through 2025's volatility, from 20% April crash to record highs by December, demonstrates remarkable durability that skeptics consistently underestimate.
The January Barometer matters less for its predictive power than its psychological impact. A strong start creates positive feedback loops: confidence breeds buying which drives prices higher, validating confidence. This self-reinforcing dynamic explains why positive Januarys correlate with strong years even without causation.
Small caps represent 2026's asymmetric opportunity. Decades of data show outsized gains following rate cuts, yet investors remain skeptical after years of large-cap dominance. This skepticism creates the opportunity - uncrowded trades deliver the best returns.
Position for continued gains while preparing for volatility. Midterm election years average 19% peak-to-trough declines that create tactical opportunities. The investors who capitalize on 2026's inevitable pullback will be those with dry powder and conviction.
Welcome to 2026 - may it bring prosperity and opportunity to all.
As always, feel free to reach out with questions about positioning for the year ahead.
Best regards,
Dan Sheehan
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.