Market Snapshot is a weekly view from our portfolio managers, offering sharp, thematic insights into the trends shaping markets right now.
Fast reading
- Since mid-November the US small-cap Russell 2000 index has outperformed the tech-heavy Nasdaq Composite by more than 10 percentage points.
- Old economy, cyclical and large‑cap value companies have been gaining traction; market volatility has boosted the attraction of defensive dividend‑paying holdings.
The market’s rotation into previously out-of-favour sectors – such as consumer staples, industrials and energy – gathered momentum this week amid ongoing concerns about the sustainability of the AI boom and valuations in the tech sector.
Since 20 November last year the US small-cap Russell 2000 index has risen 13.5%, outperforming the tech-heavy Nasdaq Composite (2.4%) by more than 10 percentage points1.
During the same period, the blue-chip S&P 500 – dominated by the ‘Magnificent Seven’ mega-caps – has risen 4.5%2.
Figure 1: Small cap stocks take the lead
The broadening out of the market is something many people have been waiting for over the last couple of years, and we think it’s a trend that will continue to have legs for some time.
“Small caps have begun to outperform for the first time in a number of years,” says Steve Chiavarone, Deputy CIO for Global Equities at Federated Hermes. “It is part of a more general broadening out across the equity markets, with the shift being driven by two phenomena happening at the same time”.
“First, within the AI trade, the market is shifting away from AI being expressed predominantly through the ‘Magnificent Seven’, and it is now moving into other bottlenecks in the AI story, such as the semiconductor capital equipment industry and the memory sector,” Chiavarone says.
“We are also seeing a broadening out of the technology layer of the AI trade – into the old economy infrastructure required to support it. You can see this in the rise of certain commodity prices and in segments of the energy sector that are responding to the build-out of data centres and related infrastructure to support AI.”
In addition, Chiavarone says, investors have been gravitating towards companies with more cyclical business models.
“Old economy names and large‑cap value companies have been gaining traction and have begun to participate,” he says, adding that the market volatility at the start of this year has also boosted the attraction of defensive dividend‑paying holdings.
“The broadening out of the market is something many people have been waiting for over the last couple of years, and we think it’s a trend that will continue to have legs for some time,” Chiavarone adds.
Many investors are worried that the release of ever more sophisticated AI tools could upend industries such as software, wealth management and video games. At the same time, there are concerns about the huge investments into AI by leading cloud service providers and when it might deliver a return.
Charlotte Daughtrey, Investment Director – Equites at Federated Hermes says the market is moving into a more “discerning phase” of the AI cycle.
“It feels like a natural evolution of the cycle. The market is moving beyond enthusiasm for the scale of investment towards a more disciplined assessment of efficiency and outcomes, with greater comfort where demand visibility is clear and scrutiny increasing where returns remain more uncertain,” she says.
The Wall Street tech sell-off has helped markets in Europe and Asia extend last year’s outperformance relative to the US. The Stoxx Europe 600 has risen 3.8% YTD and the MSCI Emerging Market Index is up more than 7% YTD3.
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1 Bloomberg as at 13 February 2026.
2 Ibid.
3 Bloomberg as at 12 February
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