The 2-to-1 Favorite Just Became the Underdog VIEW IN BROWSER
BY MIKE BURNICK, SENIOR ANALYST, TRADESMITH With 2025 just about in the books, now is a good time to recalibrate – because the old market leaders may not lead the pack anymore in 2026. Allow me to use some of TradeSmith’s proprietary indicators to show us exactly why their future isn’t so rosy… and where you can consider putting your money instead in the new year. Now, I’m not a big fan of issuing “market outlooks” or “advance predictions” – because the reality is that financial markets are always changing. Any outlook issued on New Year’s Day will most likely be out of date by Valentine’s Day… if not sooner. But as we get ready to ring in the new year, a few items stand out to me that could potentially change the narrative for stocks in 2026 in a meaningful way. We all know that the past few years have been the age of technology, and nothing has shown that as well as the “Magnificent 7.” This group of mega-cap tech stocks used to be called the “FAANGs,” after the five tech giants that led the S&P 500, but the name was updated to make room for Nvidia (NVDA) and Tesla (TSLA), while Netflix (NFLX) got dumped. And there’s no denying that the performance of the Mag 7 has been… well, magnificent in recent years, as you can see in the chart below: 
But this performance gap between the Mag 7 and everything else won’t last forever. At some point, the pendulum will swing the other way… And that swing may have already started. As you can see below, the Mag 7 don’t look quite so magnificent anymore. In fact, only two of the seven mega-cap stocks were outperforming the S&P 500 year to date, as of mid-December: 
And I believe the recent performance slip is a glimpse of things to come. As popular and profitable as the Mag 7 stocks have been for investors, this kind of dominance isn’t sustainable. Markets are competitive – and the technology market especially so. Sooner or later, competitors will want to grab some of the juicy profit margins these stocks enjoy. And when high valuations meet falling profit margins… watch out. So instead of sticking with the Mag 7, investors may be better off focusing on undervalued stocks among everyone else – call them the S&P 493! – in the new year. And while we’re looking at the market’s less-recognized stocks, it looks to me like small-cap stocks could be a largely unrecognized profit opportunity for investors in 2026! Recommended Link | | | | We just booked a 12.8% gain in 22 days on a stock we know nothing about – the equivalent of tripling your money across a year. We simply typed it into our Green Day system to spot the perfect day to buy it, with 100% historical accuracy. This works on 5,000 stocks. Claim free access to the system. |  | |
Small-Cap Stocks Are Set to Take Off in 2026 Now, it’s true that small caps have underperformed their big brothers in the S&P 500 for many years. In fact, since 2023, large-cap stocks have beaten the pants off small caps by a performance ratio of about 2-to-1. But as you can see below, that has already started to change: 
Since August, small-cap stocks have taken the lead. The small-cap Russell 2000 Index hit new all-time highs in December before either the S&P 500 Index or tech-dominated Nasdaq 100 accomplished the feat. And the reason why small- and large-cap stocks are trading places in the performance race has everything to do with bottom-line profits. I’ve mentioned in previous issues of Inside TradeSmith that profits for Russell 2000 small-cap stocks are on track to grow 41% in 2025, compared to the S&P 500’s annual earnings growth of just over 13%: 
And as you can see, earnings growth for small caps (the dark blue bars above) in 2026 are expected to steadily gain a lead on large-cap stocks (the orange bars above) quarter by quarter! Wall Street analysts are currently forecasting 43.8% profit growth for the Russell 2000 in 2026, versus just 15% in growth for the S&P 500 – and 23% for the Mag 7 tech giants. Watch Out for Early-Year Market Turbulence Zooming out to look at the broader market, there’s another shift that could be on the way in 2026. At the end of last year, I wrote that after two straight years of stellar stock market gains, you could expect more of the same – with a “threepeat” of gains in 2025! At the time, there were concerns that after back-to-back 20% gains for the S&P 500 in 2023 and 2024, we could see some reversion to the mean. And early in the year, that almost seemed like the case: The market was not without its fair share of downside drama, with a sharp decline in March and April fueled by tariff concerns. But sure enough, the S&P is on track for another great year, up just over 15%… right in line with what our data suggested at this time last year. That’s why I decided to go back to our database and check our Trade Cycles Seasonality tool to see what might be in store for 2026. Spoiler alert: While a four-peat is quite possible, you’d better watch out for more downside turbulence first… As you can see below, our Cycles chart for the S&P 500 shows the Composite Cycle peaking early in 2026, followed by a decline into the mid-year: 
The Composite Cycle is a combination of all the market cycles we track, from the short-term (< 30 days) to the very long-term (> 300 days). Keep in mind, however, that the trend in the market cycle is more important than the magnitude. That means it’s difficult to say how much the S&P could pull back in the coming months. We just know that the trend is down to some degree. What we do know for sure, though, is that there is a four-year U.S. presidential election cycle that has historically influenced market trends. And that’s something we can track with our Seasonality and Cycles tools. 2026 is a mid-term election year, which is typically the weakest year of that four-year cycle for stocks. According to our Trade Cycles data, the mid-term election-year pattern suggests the possibility of a seasonal downtrend in the first half of 2026: 
I certainly don’t like being the bearer of bad news, especially during the holiday season, but that’s what the data tells us. Just keep in mind that seasonal trends don’t always play out exactly as expected. It’s often best to use the cycles and seasonal patterns as guide and not gospel, when it comes to the potential trends. But if the historical pattern does play out similar to the past 19 midterm election years, stocks may experience turbulence in the first half of 2026. We’ll have to see – but no matter how 2026 treats the markets, you can always rely on TradeSmith’s tools to have your back. Bottom line: Small-cap profits are poised to eclipse the earnings of S&P 500 stocks – including the Magnificent 7 – in the year ahead. And that should finally fuel outperformance for small cap stocks in 2026. Just watch out for some early-year turbulence! Good investing – and Happy New Year! 
Mike Burnick
Senior Analyst, TradeSmith | 
0 Response to "The 2-to-1 Favorite Just Became the Underdog"
Post a Comment