The Hidden Story Behind “The Great Rotation”
The S&P 500 is up just +2.02% year-to-date. If you stopped there, you might think January 2026 has been quiet.
You would be spectacularly wrong.
Beneath that modest headline, one of the most dramatic rotations since 1996 is reshaping the market. The Russell 2000 has surged +7.2% YTD with a historic 15-session winning streak—the longest since 1996. Small caps are crushing large caps nearly 4:1. Memory semis, materials, and energy services are leading. Enterprise software, healthcare insurers, and ad tech are getting demolished.
The gap between winners (+35%) and losers (-15%)? 50 percentage points of dispersion.
That level of dispersion means one thing: stock selection has never mattered more. With the CAPE ratio around 36, passive indexing faces headwinds while active stock pickers capture the dispersion—for better or worse, depending on what they own.
This is the market environment where services like Stock Advisor and Alpha Picks earn their keep. When dispersion is this extreme, professional research separates winners from losers. Get started with Stock Advisor’s 23-year proven methodology.
What Rotation Actually Means (And Why It Matters to You)
A rotation happens when money flows out of one set of stocks and into another. It’s not a crash. It’s not a rally. It’s a reshuffling of leadership.
Here’s what’s happening right now, according to data from Morningstar and State Street:
| Sector/Category | 2026 YTD Performance | The Story |
|---|---|---|
| Russell 2000 | +7.2% | 15-session winning streak—longest since 1996 |
| Basic Materials | +9.05% | Gold, metals, and mining leading the market |
| Memory Semis | +30-40% (top names) | Memory cycle boom, AI data infrastructure |
| Energy Services | Strong | Benefiting from policy shifts |
| S&P 500 | +2.02% | Lagging dramatically behind small caps |
| Enterprise Software | -12% to -17% | Valuation reset hitting high-multiple names |
| Healthcare Insurers | Weak | Sector rotation out of defensives |
| Ad Tech | Weak | Multiple compression continues |
The technology sector leadership is fracturing. Memory semiconductors are crushing it while enterprise software gets repriced. Meanwhile, small caps are crushing large caps nearly 4:1—with the Fed holding at 3.50-3.75%, the rotation into smaller, more domestically-focused names continues.
If you’ve been riding the same winners from 2024 and 2025, you’re likely underperforming significantly in 2026. The names that got you here won’t necessarily get you there.
Winners and Losers: What’s Working and What’s Not
Let’s get specific. Here are the top performers through January 22, 2026:
The Winners
| Stock | YTD Return | What’s Driving It |
|---|---|---|
| SNDK (SanDisk) | +109.17% | Memory cycle boom, AI data infrastructure |
| MRNA (Moderna) | +71.75% | Biotech rotation, oversold bounce |
| WDC (Western Digital) | +39.93% | Storage demand for AI workloads |
| MU (Micron) | +37.67% | Memory pricing power returning |
| INTC (Intel) | +36.60% | Turnaround narrative gaining believers |
| ALB (Albemarle) | +34.37% | Lithium and materials strength |
| LMT (Lockheed Martin) | +22.64% | Defense spending tailwinds |
The pattern is clear: memory semiconductors, basic materials, and defense are dominating. These aren’t the AI darlings that made headlines in 2024. They’re the infrastructure plays and cyclical names that Wall Street largely ignored.
The Losers
| Stock | YTD Return | What’s Hurting It |
|---|---|---|
| APP (AppLovin) | -22.64% | Valuation correction after massive 2024 run |
| CEG (Constellation Energy) | -18.69% | Profit-taking after nuclear enthusiasm |
| INTU (Intuit) | -17.02% | Enterprise software multiple compression |
| NOW (ServiceNow) | -15.73% | High-multiple SaaS getting repriced |
| ADBE (Adobe) | -14.16% | AI disruption concerns, valuation reset |
| CRM (Salesforce) | -13.82% | Enterprise spending caution |
| AAPL (Apple) | -8.66% | China headwinds, growth concerns |
Enterprise software is getting crushed. Adobe, Salesforce, ServiceNow, Workday—the entire cohort is down double digits. These were market leaders. Now they’re market laggards.
The lesson? Yesterday’s winners often become today’s losers. Staying invested in the “same great companies” only works if you’re willing to hold through extended periods of underperformance. And sometimes, the smarter move is recognizing when leadership has changed.
Why This Environment Rewards Active Stock Picking
In a market where everything rises together, passive investing works beautifully. You buy an index fund, capture the rising tide, and ignore the noise.
But that’s not the market we’re in.
When dispersion hits 50 percentage points—when the best stocks are up +35% and the worst are down -15%—the difference between owning winners and owning losers is staggering. An index fund blends them all together and gives you… +2.02%. Meanwhile, the Russell 2000 is up +7.2% with a historic 15-session winning streak.
Active stock selection, by contrast, gives you the opportunity to:
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Overweight the sectors that are working. If basic materials and semiconductors are leading, why own them at market weight?
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Avoid the sectors that aren’t. Enterprise software is getting repriced. Do you want to own it at the same weight as an index?
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Capture asymmetric returns. The gap between getting it right and getting it wrong is enormous right now. That asymmetry favors those who do the work.
This is why professional stock picking services add value in environments like this one. Services like Stock Advisor and Alpha Picks have research teams dedicated to identifying exactly these kinds of rotation opportunities.
When the market is handing out 109% gains to some stocks and -23% losses to others, you want to be on the right side of that distribution.
The Historical Parallel: 2019
If this environment feels familiar, it should. Market analysts are drawing direct comparisons to 2019, and the parallels are striking:
| Factor | 2019 | 2026 |
|---|---|---|
| Fed Policy | On hold after rate cuts | On hold after rate cuts |
| Trade Tensions | U.S.-China tariff headlines | Trump tariff threats on NATO/Europe |
| Economy | Bifurcated (services strong, manufacturing weak) | Bifurcated (services 54.4, manufacturing 47.9) |
| Market Rotation | Value and small caps outperforming | Value and small caps outperforming |
| Dispersion | High | Very high (46.60 points) |
In 2019, investors who recognized the rotation early and positioned accordingly outperformed significantly. Those who stubbornly held onto 2018’s winners struggled.
The playbook that worked then is working now: lean into what’s working, reduce exposure to what isn’t, and stay nimble.
What the Data Is Telling Us
Let’s synthesize the key market signals as of January 23, 2026:
The Economy Is Bifurcated, Not Broken
- ISM Services: 54.4 (expansion, highest since October 2024)
- ISM Manufacturing: 47.9 (contraction, 10th consecutive month)
- Q3 2025 GDP: +4.4% annualized
- Unemployment: 4.4% (softening but orderly)
The consumer is strong. Services are booming. Manufacturing is weak. This isn’t a recession setup—it’s a bifurcation that creates winners and losers.
The Fed Is Holding Steady
- Current rate: 3.50%-3.75%
- January meeting: Holding as expected
- 2026 outlook: Markets pricing limited cuts, pushed to back half of year
With the Fed holding steady, quality companies with real earnings and pricing power outperform speculative growth names. This environment favors the kind of businesses that Stock Advisor targets—companies with competitive moats and recurring revenue.
Sentiment Has Reset
- AAII Bullish: 43.2% (down from 49.5%)
- VIX: 15.06 (normalized after spiking to 20)
- Bull-Bear Spread: +10.5% (healthy, not euphoric)
The tariff volatility in early January shook out some excess optimism. That’s healthy. Markets tend to perform better when sentiment isn’t at extremes.
Actionable Takeaways for Stock Pickers
Based on everything we’ve covered, here’s how to position for this rotation:
1. Don’t Fight the Rotation
If technology is lagging and basic materials are leading, respect that. You don’t have to abandon tech entirely, but consider whether your portfolio is overweight in sectors that are underperforming.
2. Look Beyond the Magnificent Seven
Apple is down 9%. The megacaps that dominated 2024 are not dominating 2026. Small caps are outperforming large caps by 10:1. The opportunities may be in names you’ve never heard of.
3. Focus on Semiconductors Selectively
Semiconductors are a mixed bag. Memory names (Micron, Western Digital, SanDisk) are crushing it. But not all semis are created equal—equipment makers and memory stocks are leading, while others lag.
4. Be Wary of High-Multiple Software
Enterprise software is getting repriced. Adobe, Salesforce, ServiceNow, Workday—all down double digits. These are quality companies, but valuations matter. The market is no longer willing to pay premium multiples for premium growth.
5. Consider Defense and Industrials
Lockheed Martin, Huntington Ingalls, Builders FirstSource—these industrial names are quietly outperforming. Defense spending is a tailwind, and the reshoring narrative benefits domestic industrials.
How Stock Picking Services Help in This Environment
When dispersion is this high, professional research isn’t a luxury—it’s an edge.
Services like Stock Advisor have teams dedicated to identifying exactly these kinds of rotation opportunities. They’re not just looking at what worked last year. They’re analyzing where the market is headed and positioning accordingly.
For investors who want to capture the 109% winners rather than the -23% losers, having access to professional research and recommendations can make the difference between outperforming and underperforming.
This is a stock picker’s market. The only question is whether you’re doing the picking yourself or leveraging the expertise of those who do it full-time.
If you’re serious about navigating this rotation, explore our guide to the best stock advisors and find a service that matches your investment style.
The Bottom Line
The S&P 500’s 1% return masks one of the most dramatic rotations in years. With 46.60 points of dispersion between winners and losers, stock selection has never mattered more.
The winners: memory semiconductors, basic materials, defense, and small caps.
The losers: enterprise software, megacap tech, and last year’s momentum names.
This environment rewards active investors who can identify where leadership is shifting and position accordingly. Passive investors will capture the blended return—about 1%. Active investors who get it right will capture multiples of that.
The data is clear. The rotation is real. The question is whether your portfolio is positioned for what’s working now—or still anchored to what worked before.
Frequently Asked Questions
What is “The Great Rotation” in 2026?
“The Great Rotation” refers to the dramatic shift from large-cap to small-cap leadership in early 2026. The Russell 2000 has surged +7.2% YTD with a historic 15-session winning streak (the longest since 1996), while the S&P 500 lags at just +2.02%. Small caps are outpacing large caps nearly 4:1, creating 50 percentage points of dispersion between winners and losers. This rotation favors active stock selection over passive indexing.
Why does stock picking matter more in 2026?
Dispersion is at historic highs, making stock selection dramatically more valuable. With 50 points separating winners (+35%) from losers (-15%), the gap between owning the right stocks and the wrong stocks is enormous. Passive index funds blend winners and losers together, giving you the average. Active stock picking lets you target the winners—memory semis, materials, energy services—while avoiding the laggards like enterprise software and ad tech.
Which sectors are winning in the 2026 rotation?
Memory semiconductors, basic materials, and energy services are leading, while enterprise software and healthcare insurers are lagging. The Russell 2000’s 15-session winning streak shows small caps dominating. Companies with domestic focus and pricing power are benefiting from the current Fed stance at 3.50-3.75%. Services like Alpha Picks (79.2% win rate for 1-3 year holds) and Stock Advisor (92.8% win rate for 10+ year holds) help identify sector rotations early.
How do I position my portfolio for the rotation?
Match your stock picking service to your time horizon. For 1-3 year horizons in this rotation environment, Alpha Picks’ quant-driven approach excels at identifying sector shifts early. For 5+ year horizons, Stock Advisor’s quality-focused methodology has delivered through multiple market cycles. For DIY researchers, Morningstar’s fair value discipline helps identify undervalued opportunities at elevated CAPE ratios around 36.
Is it too late to capture the small-cap rally?
Rotations typically play out over quarters, not weeks. While the Russell 2000’s 15-session streak is historic, the fundamental drivers—Fed policy, domestic focus, and valuation gaps between small and large caps—remain in place. The key is not timing the rotation perfectly but having exposure to the sectors and market caps that benefit. Professional stock picking services help identify which specific small-cap and mid-cap names have the strongest fundamentals within the broader rotation.