Great Rotation: Small Caps Take Lead as Big Tech Slumps
The shift into small-cap names could be perceived as bullish, as it indicates investor optimism about the broader economy.
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Messy rotational action hit the market on Thursday as big-cap technology names slumped while the Russell 2000 (IWM) jumped more than 1%. The Magnificent Seven (MAGS) managed to bounce back from an intraday dip, but the Nasdaq 100 (QQQ) finished down about 0.5%. This weakness was primarily driven by the semiconductor sector (SMH) , which continues to face some profit-taking pressure.
Small-cap leadership typically produces strong positive breadth, and that was exactly the case on Thursday. About 61% of stocks finished in positive territory. There were 270 new 12-month highs, and my list of stocks rising by more than 10% was quite long. I had unusually high volatility in my accounts, with several big winners offset by several big losers.
The Case for the Small-Cap Move
An argument can be made that small-cap leadership is fundamentally bullish. It indicates that investors are finally appreciating the value these names offer and are feeling optimistic about broader economic growth.
Smaller stocks are naturally more sensitive to interest rates because they typically require more capital than mega-cap giants. With the market looking for a friendlier Federal Reserve in 2026, these rate-sensitive names could see a further boost.
I have a strong bias toward small caps because they reward astute stock picking. There are many gems in this space still waiting to be discovered. For the last several years, investors took refuge in the Magnificent Seven and large-cap technology not because they were good values, but because they offered the safety of relative strength. No one seemed to care that Apple (AAPL) was trading at a PE of 40 with single-digit growth as long as it kept moving up.
Looking Ahead: The Jobs Report Catalyst
The December jobs report is due on Friday morning, and it is almost certain to evoke a reaction. Analysts are expecting a moderate slowdown in hiring, which could be the pivot point for Fed expectations.
I anticipate that the bias toward individual stock picking will continue to outperform the "safe haven" of AI for a bit longer. My plan is to spend more time shaking the trees for some new ideas as this rotation develops.
Have a good evening. I will see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
