Important Signal! Suddenly, a collective surge! Good news for U.S. small-cap stocks!

Is a Style Shift in the U.S. Stock Market Coming?

After recent market volatility severely impacted certain sectors and assets, investors are turning toward cheaper, smaller-scale companies.

Last Friday, despite the S&P 500 rising 1.78% and the Nasdaq 100 rebounding nearly 2%, the Russell 2000 Small Cap Index, which reflects the performance of U.S. small-cap stocks, outperformed with a 3.6% gain. Among the “Big Seven” U.S. stocks, some did not participate in this rally; Amazon’s stock price fell over 5%, Google dropped more than 2%, and Meta declined by 1%.

Bank of America Chief Investment Strategist Michael Hartnett said that tech giants are no longer the winners, and small caps are more worth betting on than tech stocks.

Small Caps Rally Strongly, Russell 2000 Surges

In recent weeks, as investors adjusted their holdings, some of the most impressive market sectors in recent years have been filled with caution and risk-avoidance sentiment, while others have seen capital inflows. For example, the Dow Jones Industrial Average, which tracks industrial companies, hit a record high last Friday, while software sector stocks shrank by $1 trillion in market value that week.

Last Friday, the Russell 2000 Index, reflecting the U.S. small-cap stock market, surged 3.6%, the Wind Market US Small Cap Index rose 3.42%, and the Micro Cap Index jumped over 4%.

Reuters pointed out that investors are betting that after years of gains driven by tech stocks, the rally will spread to industrials, healthcare, and small caps. ProShares Global Investment Strategist Simeon Hyman said, “I believe that the rally expansion that started last fall and has become especially evident in recent days will continue after a long period of ‘marginalization of mega tech stocks.’ Dividend growth, equal-weighted indices, and small companies could all benefit.”

This view stems from investors reassessing the risks embedded in previously soaring market sectors, including precious metals, tech stocks, and more speculative assets like Bitcoin, which briefly plunged to a 16-month low of $60,000, then rebounded slightly below $70,000 last Saturday afternoon, still well below the all-time high of $126,000 on October 12 last year.

Jim Carroll, Wealth Advisor at Ballast Rock Private Wealth, said, “People are reacting to various reasons behind these assets’ setbacks, seeking ways to rebalance their portfolios and steer clear of the most crowded trades.”

Bank of America Chief Investment Strategist Michael Hartnett said that funds should be moved away from crowded tech giants and cryptocurrencies toward small caps and international markets that benefit from the economic recovery.

Hartnett believes that the Trump administration, in response to voter dissatisfaction with living costs, will intervene in energy, healthcare, credit, and electricity prices to curb inflation. This policy approach, combined with AI’s cooling effect on the labor market, will lead to an unexpected decline in inflation by 2026, benefiting small and mid-cap stocks.

Hartnett sees 2025–2026 as the end of the “American exceptionalism” and the start of a “global rebalancing.” In this new cycle, the winners will no longer be U.S. tech giants but international stocks, Chinese consumer stocks, and commodities producers in emerging markets. For investors, the tactical approach is clear: amid the roar of a bursting bubble, seek assets that have been long overlooked and are closely tied to the real economy.

Ongoing Skepticism About AI Returns

Some traders warn against overinterpreting last Friday’s sharp rise in U.S. stocks, suggesting that the new risk appetite is still evolving. Many reliable funds that previously bought decisively during declines are now entering more slowly and cautiously.

Thierry Wizman, Global FX and Rates Strategist at Macquarie Group, said, “In the future, there will be strong doubts and questions.” These questions will focus on how mega-corporations will profit from their new capital expenditure plans and how much damage these investments could do to traditional businesses that might be replaced by AI.

The iShares Expanded Tech Software ETF rebounded 3.5% last Friday but still declined 9.1% for the week, indicating that the late-day rally did not fully recover all losses. Similarly, silver rebounded but remains well below recent highs above $90 per ounce.

Travis Prentice, Chief Investment Officer and Portfolio Manager at Informed Momentum Company, said, “Defensive stocks are indeed performing actively. I believe this is not just a short-term trade but also reflects a retreat in speculative assets.”

Citigroup U.S. Market Strategist Scott Chronert said that the market is increasingly splitting into two camps: long-term favorites and a new wave of stocks investors hope to profit from. He said, “While we’re all here discussing AI controversies, the market is actually evolving in different directions. Investors have decided they no longer want to add to existing positions at higher prices. Instead, we see capital quietly flowing into energy stocks, materials companies, consumer staples, and industrials.” These economically sensitive sectors have posted double-digit gains this year, while the S&P 500 has only risen 1.3%. Chronert summarized, “We initially expected the market to expand, but not in this numb, turbulent way.”