Mega caps have been the dominant market force in recent years, handily outpacing other areas, and particularly small caps. As a result, large caps were a key focus within most portfolios entering 2026. Ironically, mega cap stocks have been among the weakest performers this year, with the Invesco S&P 500 Top 50 ETF (XLG) down 0.5% YTD. Conversely, small caps have been leading the way to the upside, with the Russell 2000 (RUT) up more than 6% YTD. The Russell 2000 is now on pace to outperform the S&P 500 (SPX) for the ten trading days—the longest streak since 2008. Given the shift this year, are large caps finally passing the torch to small caps?

One supporting notion behind the resurgence of small caps is that recent movement isn’t coming out of nowhere. Last month, we noted that the Russell 2000 beat the S&P 500 over the last six months of 2025. In 23 prior instances where small caps bested large caps in the second half of the year, the Russell 2000 averaged 1.4% of outperformance versus SPX in the following year, with all of that coming in the first month. Conversely, when small caps lagged in the second half, the Russell 2000 underperformed the S&P 500 by an average of 2.6% the following year. While last year’s finish supports the recent Russell rally, does early-year strength historically translate into rest of year outperformance?

Since 1979, there have been eight other years when the Russell 2000 outperformed the S&P 500 by more than 2.5% through the first two weeks. In those cases, the Russell 2000 averaged a 9.36% gain for the remainder of the year, compared to 11.9% for the S&P 500. Therefore, early small cap strength has not signaled sustained leadership, as large caps typically regain ground. Furthermore, each of the last six years in which small caps outperformed early saw the group underperform across the rest of the year. Our current period also overlaps with the “Modified January Effect” (Dec 15–Jan 15), during which the Russell 2000 has historically outperformed the S&P 500 by about 1.4% since 1997. Given the seasonal trend and lack of historical follow-through, excess returns during this period don’t seem particularly significant, especially over the last decade.

On a relative basis, small caps still have ground to make up against large caps. Over the past five years, the Russell grew a cumulative 23% compared to 82.5% for the S&P 500, underscoring the sizeable difference in their two long-term trends. The iShares Russell 2000 ETF (IWM) is back at all-time highs while trading in a positive trend, earning a solid fund score of 4.38. However, the iShares S&P 500 Index (IVV) still holds a more robust score of 4.94, due largely to the fact the it holds long-term market relative strength, whereas IWM has been on an RS sell signal versus the S&P 500 Equal Weight (SPXEWI) since January of 2022. 

The Russell 2000 has a real shot to outperform SPX for the first since 2020, and it’s been a decade since small caps beat large caps more by more than 5% (2016). Despite encouraging positioning right now, small caps have been volatile in recent years, so further improvement and consistency are needed before we crown them market leaders. That's not to say small cap don't look good, just that large caps continue to hold the throne for now given their long-term relative strength

We’re now about halfway through January and thus far the market has gotten off to a decent start; year-to-date (through 1/14) the S&P 500 (SPX) is up 1.18%, which, coincidentally, almost even with last year when the index was up 1.16% through 1/15. If you've kept up with our report over the years, you're probably familiar with the old market adage, "As January goes, so goes the year," which suggests that the first month of the year has a way of foreshadowing the calendar year results.  

The idea is that if January brings a gain for the market, the rest of the year will follow suit and end in positive territory. If the market is down in January, the adage warns a loss for the year is likely. The adage has held true for the last four years.  In 2022, the S&P 500 (SPX) finished January down more than 5% and went on to lose more than 19% for the year. In 2023, SPX gained more than 6% in January and followed through to finish the year up more than 24%. SPX finished January 2024 with a gain of 1.6% on its way to another gain of more than 20% for the year. And last year, the index gained 2.7% in January and finished the year up 16.4% The prior two years bucked the trend as the S&P posted a loss in January but went to finish both years with strong gains; SPX was down -0.16% in January 2020 and -1.11% in January 2021 but ended the year with gains of 16.26% and 26.89% in 2020 and 2021, respectively. There is research to support the January bias using historical data going back to 1950, and we have outlined some of the more relevant bullet points below.

January Barometer Stats: 

• When the S&P 500 is positive in January, it recorded a gain for the full year 89% of the time.
• The “barometer” has been more accurate predicting up years than down years. When the S&P 500 is down in the month of January, it has finished down for the full calendar year 50% of the time.
• The barometer has been "right," either to the upside or downside, almost 74% of the time.
• There have been 12 "really wrong" years, in which the SPX has logged a gain or loss of more than 5% in the opposite direction of January's return.
• The average return for years starting with a positive January is +16.9% for the year.
• The average return for years starting with a negative January is -1.74%.

While the adage has an attractive success ratio, it is certainly not fail-safe. In fact, 7 of those 12 years where the barometer has been "really wrong," have occurred since 2009, including 2014, 2016, 2018. 2020, and 2021. In 2018, SPX started strong, gaining 5.82% in January, but finished the year down more than 11%. Back in 2016, SPX fell more than 5% in January, the seventh-worst January on record since 1950, before rallying to finish the year with a gain just shy of double digits. Other large discrepancies between January and full-year returns occurred in 2009, 2010, and 2014.  

It is worth noting that nine of the 12 times the barometer has been “really wrong” were instances when SPX had a negative January return but went on to post solid gains for the year; there have been only three occasions since 1950 when SPX logged a gain for January and went on to lose more than 5% for the year. With the S&P in the green thus far in January, the early signs point to a positive 2026.

The image below shows the past 76 years (excluding the year-to-date 2026 entry) of data for the January Barometer. Keep in mind that these historical tendencies are just that, tendencies, and should not serve as a primary indicator for anyone looking to tactically manage market risk. If you are interested in reading more about the January Barometer concept, other month's "barometer" capabilities, and how the theory applies to the Dow Jones and Nasdaq Indexes, you can review this piece published by stocktradersalmanac.com.

Daily Option Ideas for January 15, 2026