Reverse Rotation Takes Center Stage as Big Tech Earnings Loom
Small-cap leadership will be tested as the focus shifts to Mag 7 earnings reports.
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Investors are digesting a rollercoaster week of action on Friday as they look ahead to next week when four of the Magnificent Seven names report earnings and the Federal Reserve issues its latest interest rate decision.
Small-Caps Defy the Mainstream Narrative
While the mainstream business media is reporting that it has been a difficult week for the market, the reality is that it was an extremely positive week for many smaller stocks. The Russell 2000 is up 1.5% over the last three trading sessions and continues its historic streak of outperforming the S&P 500. The Magnificent Seven is close to flat this week after its best day of 2026 on Thursday.
The Technical Case for a Reversal
The rotation into the Russell 2000 has been fast and furious in 2026, and the big question now is whether we will see a reversal of that rotation as the group becomes technically extended. There are two ways that could occur. We could see either a broad market selloff or a distinct reverse rotation out of the Russell 2000 and back into big-cap technology.
Earnings as a Catalyst for Big Tech
A reverse rotation is the most likely scenario as investors look ahead to earnings from Microsoft (MSFT) , Meta (META) , and Tesla (TSLA) on January 28 and Apple (AAPL) on January 29. Expectations have come down sharply for the AI sector, and it won’t take much to create a positive surprise.
There was a taste of this reverse rotation on Thursday with the Mag 7 outperforming the Russell 2000 for only the second time since December 23, 2025.
The Return of the Stock Picker
The best advice I can give right now is not to focus too much on the indexes. There are some sector trends underway, but this is primarily a stock-picker's market right now. When small-caps are leaders, it is astute stock pickers who produce the best results. You cannot simply hide in the safety of mega-cap AI names as many investors did for the last two years. Stock selection is paramount when small caps are jumping.
Stock picking will remain extremely important as we head into the bulk of earnings reports. Earnings are stock-specific, and there will be some big winners and losers regardless of overall market conditions. This reverse rotation action can help boost or punish the response to some reports, but a good report is still going to see a positive response.
Morning Market Pulse
We have flat action early on Friday. Intel (INTC) is seeing a negative reaction to its earnings report, which is slowing down the semiconductor sector which has been on a tear. Precious metals continue to trend higher, with spot gold approaching the important psychological level of $5,000 per ounce.
At the time of publication, Rev Shark had no positions in any securities mentioned.
