We’re just three weeks into the new year and it’s already clear the market is undergoing an aggressive leadership shift and rotation.
Look no further than the raw macro numbers from two weeks ago. The S&P 500* was marginally down for the week at -0.38%. Conversely, if you look at the same index equally weighted, it rose by 0.78%:
This means the average stock in the S&P 500 rose heavily while the market weighted index struggled. This is a trend we’ve observed since the first week of the year and it’s continued. It reflects a rotational catch-up trade we said to expect in our 2026 market outlook.
We're seeing an even more extreme version of this broadening rotation represented by the Russell 2000 index, which is laden with small-cap companies. It’s had a rocket-like start to the year:
Today we’ll examine whether the underlying data metrics indicate if this is a healthy and sustainable rotational broadening or not.
To illustrate the magnitude of this rotation, since the beginning of the year the sectors receiving the greatest number of inflows are industrials, materials, and energy:
For perspective, looking just at the Jan. 20 trading session, 32.7% of all institutional inflows into stocks went into the materials sector alone.
Meanwhile, the outflow leader is technology. But don’t dump your tech stocks just because of the current rotational outflows.
The selling in the technology sector has focused on software firms which is the tech sub sector most vulnerable to the growth and implementation of AI. And these sorts of rotations have hit tech before, including software companies:
Usually such deep, sudden selling is an initial short-term drag on the whole sector. But historically, big red shoots are buy-the-dip opportunities that deliver gains in the months and years ahead:
Yes, rotation is happening and it means opportunities outside of tech. But by no means is tech dead.
Seeing beyond the broadening market story, we’re also seeing something rare in companies with large market capitalizations. As of this writing, the whole S&P 500 gained 0.5% so far in 2026. But the average stock in the S&P 500 has gained an eye-opening 4.02%:
Perhaps more impressively, 64.2% of the stocks in the S&P 500 are beating the index return.
We at Cornerstone think the lesson here is simple. That is, last year’s large-cap dominance has taken a back seat to the broadening catch-up trade we discussed in detail to expect in our 2026 Market Outlook.
This is evident in the institutional inflows when viewed through the lens of market caps:
Nearly all the inflows have gone to companies below $300 billion in market cap.
This helps explain the abrupt change of character within the markets. And it’s not just market cap sizes shifting. There’s been an almost complete reversal in sector rankings too.
Most of 2025 was dominated by technology stocks, especially big tech. But now tech and communications are near the bottom of the rankings:
The broadening rotational market trade is creating new leaders within the materials, industrials, energy, and discretionary sectors. This is why the early 2026 market rotation is leaving the market weighted S&P 500 in the dust.
So, will this trend continue?
Keep in mind that market price action is determined by the flow of money. When demand is high, stock values go up. When supply is high and demand is low, stock values go down.
Look how money has been flowing into stocks since the beginning of the month:
Even with this rush of inflow capital, the S&P 500 is “only up” 0.6% this year.
Investors who look solely at the surface level market weighted S&P 500 may feel that the stock market has started the year out slow. But using fundamental data and a money flows perspective, we can see there's actually an extraordinarily healthy, violent rotation taking place under the surface.
Lastly, there's evidence that this rotational trend of healthy money inflows has room to run. We can see it in MoneyFlows’ trusty Big Money Index (BMI), which is a 25-day moving average of netted institutional investor activity. Even with the rush of inflows, the BMI is still far from overbought:
That indicates there's further value and runway ahead. And that’s even true in the technology sector.
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