Markets Digest Rotation as Tech Falters, Small Caps Surge

Stocks showed mixed performance Thursday as investors continued a sharp rotation out of mega-cap tech and into small caps, energy, and defense. The Nasdaq 100 slipped, dragged lower by Apple and Nvidia, while the Dow led on gains in industrials and energy. Small-cap strength was the standout, with the Russell 2000 hitting a record as the rally broadened beyond 2025’s narrow tech leadership. A pause in the recent bond rally and rising oil prices further underscored shifting market dynamics as investors grow more cautious ahead of Friday’s jobs report.

Key Headlines & Market Movers:

• Broadening Rally: Small Caps and Cyclicals Lead: The Russell 2000 jumped 1.1%, extending its early 2026 outperformance over the Nasdaq 100 by about 4 percentage points, marking the second-strongest start on record. Energy, defense, and consumer stocks gained favor as markets rotated into more economically sensitive areas. Valuation and earnings upside in small caps are drawing interest, with some strategists suggesting this could mark the beginning of a longer cycle of small-cap leadership after years of underperformance.

Tech Takes a Breather: The Nasdaq fell 0.6%, led by weakness in storage and semiconductor names. Sandisk, Western Digital, and Seagate dropped between 5.5% and 8%, while Nvidia and Apple also slipped. Alphabet was a rare bright spot, hitting an all-time high after surpassing Apple in market cap. With tech shares under pressure and positioning stretched, the pause may reflect profit-taking and shifting sentiment ahead of earnings season.

• Energy and Defense Rally on Policy and Price Tailwinds: WTI crude surged over 4.5% to $58.50, lifting oil and services stocks like APA, Halliburton, and Occidental. Defense names rebounded sharply after Trump proposed a $1.5 trillion defense budget for 2027, seen as a policy signal rather than an imminent shift, but enough to fuel strong moves in Lockheed, Northrop Grumman, and General Dynamics.

Treasury Yields Tick Higher on Labor Data: Yields edged up with the 10-year near 4.19% as jobless claims rose less than expected and layoff data hit a 17-month low. These signals of labor market resilience suggest the economy remains on solid footing, potentially complicating the Fed’s path to rate cuts. Still, markets continue to price in at least two cuts for 2026, pending Friday’s payrolls report.

S&P 500 Sector Performance

Looking Ahead

The market’s strong early-year start is meeting resistance as investors reassess leadership, growth expectations, and Fed policy. Friday’s jobs report will be key to shaping near-term rate expectations. With geopolitical risks and earnings season looming, positioning is likely to remain cautious and rotational themes may persist as investors search for relative value beyond big tech.

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