Major U.S. stock indices ended last week nearly flat, hovering near record highs as the fourth-quarter earnings season entered a period of intense releases. A sector rotation emerged in the markets: the Russell 2000 index, a benchmark for small-cap stocks, set consecutive record closing highs over the final three trading days; the Dow Jones Industrial Average, less influenced by tech giants and the dominant AI theme, led the gains among major indices. The S&P 500 was essentially unchanged for the week, while the Nasdaq Composite declined by approximately 0.4%. Oil prices, which required close monitoring due to geopolitical news from Venezuela, Iran, and Greenland, also showed little change for the week, inching up less than 0.5%.
In the coming week, as the Q4 earnings season unfolds in full force and the Federal Reserve's next policy meeting approaches, investors will focus on three primary themes. First is the speech by U.S. President Trump scheduled for Wednesday morning Eastern Time at the World Economic Forum in Davos, Switzerland. The second will be any new developments regarding Trump's considerations for the next Federal Reserve Chair. As of Friday afternoon, the Polymarket prediction market indicated that former Fed official Kevin Warsh was the frontrunner for the nomination, with a 60% probability. This follows Trump's comments at an event on Friday to National Economic Council Director Kevin Hassett, another leading candidate, that he would prefer Hassett to remain in his current role. The aforementioned geopolitical entanglements, along with a series of domestic policy proposals from the administration this year—ranging from credit card fee caps and multiple plans to assist potential homebuyers to adjustments in tariff policy—could all become topics of discussion during what is one of Trump's most significant international appearances this year.
The third key theme is the acceleration of fourth-quarter earnings releases, with the most prominent being the results from Netflix (NFLX.US) and Intel (INTC.US). Netflix is currently embroiled in one of the most high-profile corporate events in recent years: an attempt to acquire Warner Bros. Discovery while fending off a competing bid for the famed studio from Paramount Skydance (PSKY.US). Netflix's offer for Warner Bros. Discovery's streaming and film assets remains its preferred transaction. Reports last week suggested the streaming giant is preparing to increase its bid, shifting to an all-cash offer to match certain terms of Paramount Skydance's partial acquisition proposal. Netflix's proposal excludes taking on Warner Bros. Discovery's cable television and news businesses, whereas Paramount's offer includes them.
Intel's earnings will provide investors with clues about the current state of the artificial intelligence investment theme, as is the case with almost every segment of the tech supply chain. The stock has surged approximately 100% since August 2025, when the U.S. government announced it held about a 10% stake in the chipmaker.
The rotation of 2026. For much of the past decade, Wall Street strategists have attempted to identify and analyze new market rotations at the start of each year. Just into the second week of 2026, attentive investors are likely familiar with the early winners and losers that have emerged: small-cap stocks have benefited, while some areas of tech have cooled. The Russell 2000 index is trading at record highs. The S&P 500 Equal Weight Index (which gives each company in the index the same weighting, rather than weighting by market cap) hit a record closing high on January 13th. Concurrently, software stocks have been among the worst performers year-to-date. Companies like Intuit (INTU.US), ServiceNow (NOW.US), Adobe (ADBE.US), AppLovin (APP.US), and Salesforce (CRM.US) have all fallen more than 12% since the start of the year.
As Fundstrat strategist Hardika Singh wrote in a client note on Friday, the strength in the Russell 2000 suggests investors hold a positive view of the U.S. economic outlook, as these companies typically derive a higher percentage of their revenue from domestic customers compared to S&P 500 constituents (which generate about 40% of their sales overseas). Singh also noted that the Russell 2000's rally is not strictly a 2026 phenomenon; over the past six months, the index has gained about 20%, compared to a roughly 10% rise for the S&P 500.
However, it is noteworthy that while the "Russell revival" might imply greater investor optimism about the U.S. economy, the theme driving this rally is the very one that brought investors into the market: AI. "The fact that everything from power suppliers to defense companies to mining stocks is participating in this rally suggests it has staying power," Singh wrote. "Fuel cell maker Bloom Energy (BE.US) is up 60% year-to-date, Kratos Defense & Security Solutions (KTOS.US) is up 64%, and Hecla Mining (HL.US) has gained 31%. They are being propelled by the same themes that drove their large-cap peers to record highs over the past year, such as the urgent need to power AI data centers and soaring gold prices boosting miners' margins."
Furthermore, the S&P 500 index itself tells a similar story. Leading the benchmark index year-to-date are companies like Sandisk (SNDK.US), Lam Research (LRCX.US), Western Digital (WDC.US), and Intel—names that also topped the S&P 500 performance chart in 2025. These names are all stamped by the AI investment theme, with a bias towards the hardware side. The AI investment theme has diversified over the past three years. Yet, many investors and commentators still do not view the "Magnificent Seven" as the biggest winners of this theme. While most of these stocks have performed exceptionally well since the spring of 2023, and the "Magnificent Seven" remain the market's largest companies by capitalization, one factor bolstering the confidence of market bulls as the AI theme enters its fourth year is precisely the type of action defining the market so far in 2026: a robust rotation into new derivatives of the same overarching theme.
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