Why Small Caps Are Skyrocketing While Tech Giants Face a Shocking Decline – Don’t Miss Out!

The stock market is undergoing a significant shift in early 2026, as small-cap companies are beginning to outpace their larger counterparts. This trend marks a notable reversal from the dynamics observed in 2025, where large-cap firms dominated the market with impressive gains. According to Michael Arone, chief investment strategist at State Street, “We are most definitely seeing a rotation, and it has picked up some momentum from the end of last year.”

In 2025, large-cap companies ended the year with a robust gain of 19.78%, significantly outperforming small- and mid-cap firms. However, early data for 2026 shows a different story. Small-cap companies have seen gains of 5.57% year-to-date, while large caps have barely moved, gaining just 0.56%. Compounding this shift, the tech sector, which had thrived in 2025 due to an AI investment boom, is now struggling, reporting a decline of 0.40% this year.

The catalyst behind this rotation appears to be earnings growth among small-cap and non-tech companies, which are starting to close the gap with the so-called “Magnificent Seven” — the group of dominant tech companies including Apple, Microsoft, Amazon, Alphabet, Meta Platforms, Tesla, and Nvidia. Arone notes that profits for small-cap firms are being bolstered by lower interest rates and supportive fiscal measures like the One Big Beautiful Bill Act. This has made small companies increasingly attractive to investors.

Geopolitical events are also contributing to this market shift, particularly as investors seek to diversify their portfolios in uncertain times. Arone suggests that recent occurrences have amplified trends that began to emerge at the end of last year and have gathered momentum in the early weeks of 2026. The overall strength of the US economy is playing a crucial role, pushing small-cap and non-tech companies into a favorable position relative to their larger peers.

“I think of it as this powerful one-two punch of an economy that’s doing better than expected, supported by fiscal and monetary stimulus, combined with broadening earnings growth,” Arone comments. If this trend continues, he anticipates that the market rotation could sustain through the remainder of the year, suggesting a rally over the next few quarters.

Tech Sector Falters After 2025 Surge

The tech sector, which benefitted significantly from the AI investment boom in 2025, is now facing challenges. While large-cap tech stocks led the market last year, they are now lagging behind. In contrast, real assets are seeing significant gains. According to Arone, the basic materials sector has recorded the largest gains this year, rising by 9.05%, followed closely by sectors such as industrials and energy.

Despite the current slump, Arone remains optimistic about the tech sector’s potential for growth in 2026. A recent announcement from Taiwan Semiconductor Manufacturing revealed record-setting fourth-quarter earnings, which has led to a rise in chip stocks across the US market. However, he maintains that the earnings growth among small-cap and non-tech companies supports a broader market rotation. “The gap between technology earnings growth and the rest of the market is closing,” he states, underscoring a healthy diversification in the rally.

The financial services sector, while not performing as well as hoped, is showing signs of recovery. It has been the second-worst performer so far this year, with a decline of 0.33%. However, following strong earnings reports from major Wall Street banks like Goldman Sachs and Morgan Stanley, the sector is beginning to rebound, highlighting that it may not be on a sustained downturn.

In terms of returns, 2025 was a stellar year for large-cap companies. Still, early 2026 shows a shift, with small-cap firms delivering the strongest returns across both value and growth indexes — 5.94% for value and 6.02% for growth, compared to 2.80% and 0.13% for large caps, respectively. This shift highlights the importance of diversification in investments and suggests that markets can rally without solely relying on contributions from the major tech players.

Looking ahead, Arone believes that the current bull market is providing “fuel to the fire” for small-cap and non-tech companies. The expected steady interest rates and ongoing fiscal stimulus are likely to drive the economy’s performance above expectations. Additionally, geopolitical events are expected to stimulate greater investments across the market in 2026, further supporting small-cap stocks as a viable investment choice. “I expect this to continue for a bit longer,” he concludes.