Wall Street Daily (January 17): The 'Great Rotation' in US stocks continues, with the three major indices slightly down; Russell 2000 outperforms for the 11th consecutive day

[Summary] U.S. stocks were mixed on Friday, with the S&P 500 index slightly down by 0.06%, Nasdaq index down by 0.06%, and Dow Jones index declining by 0.17%. The Russell 2000 small-cap index bucked the trend, closing up 0.12%, outperforming the broader market for the 11th consecutive day. At the beginning of 2026, the long-anticipated 'Great Rotation' on Wall Street is still unfolding. Market funds continue to shift from tech stocks, which have been the most popular over the past three years, to small and mid-cap stocks and cyclical sectors. Trump, at the White House, expressed his hope that NEC Director Hassett would stay in his current position, fueling market expectations of a more hawkish Warsh becoming the Fed Chair. After Trump’s speech, the four major indices hit intraday lows but trimmed losses towards the close, with Treasury yields rising above 4.2%. In terms of major asset classes, the U.S. Dollar Index rose slightly by 0.03%, gold dropped by 0.43%, crude oil edged up by 0.08%, and Bitcoin fell by 0.06%.

I. Major Events

1. Trump hints at Hassett's continuation at the NEC, boosting Warsh's chances for Fed Chair significantly

During a healthcare event at the White House, Trump told NEC Director Hassett, "I want you to stay in your current position." The market immediately interpreted this as reducing the likelihood of Hassett, who was previously considered more dovish, becoming the Fed Chair. On the prediction market Kalshi, Warsh’s nomination probability jumped from 50% to 60%, while Hassett’s fell back to 16%.

The market generally believes that Warsh holds a more hawkish stance and may adopt a more cautious approach to rate cuts. Following the news, the 10-year U.S. Treasury yield rose from 4.17% to above 4.2%, and the three major indices were briefly pushed to their intraday lows.

2. Fed Vice Chair Jefferson/Bowman delivers remarks

Fed Vice Chair Jefferson expressed 'cautious optimism about 2026' at the AIER conference, stating that the labor market is stabilizing and the economy is in a good position to continue growing. Vice Chair for Supervision Bowman, however, cautioned that the labor market 'is becoming more fragile beneath the surface,' emphasizing that this fragility could bring risks at the policy level.

Chicago Fed's Goolsbee also voiced concerns about inflation, noting that it remains near 3%. Market pricing indicates only a 5% probability of an interest rate cut at the January FOMC meeting, with the mainstream expectation still pointing to a 'wait-and-see' approach.

Small-cap stocks outperformed large-cap stocks for the 11th consecutive day, marking the longest streak since 2008.

The Russell 2000 has outperformed the S&P 500 for 11 consecutive trading days, the longest streak since June 2008. Year-to-date, the Russell 2000 has risen over 7%, while the S&P 500 has gained just 1.5%. Meanwhile, five of the seven components in the Magnificent Seven (Mag 7) have declined since the start of the year, indicating a more pronounced rebalancing of capital.

Market explanations for the 'small-cap dominance' focus on three main points: First, the valuation gap between large and small caps has widened to a 25-year extreme, fueling expectations of mean reversion; second, a drop in interest rates to 3.5%-3.75% benefits small-cap companies, which are more sensitive to financing conditions and carry higher leverage; third, small-cap earnings growth expectations for 2026 are 17%-22%, higher than the S&P 500’s 14%.

II. Major Trends

Divergence in major indices: Small-cap stocks continue to lead.

Small-cap stocks (IWM) rose 4.65% in two weeks and 10.34% in three months, leading among the four major indices. Large-cap stocks (SPY) gained 6.77% over three months, lagging significantly behind small caps. The trend of capital shifting from large-cap tech stocks to small and mid-cap as well as cyclical sectors continues, with valuation gaps and differences in earnings expectations driving rotation.

Industrial stocks outperform tech stocks.

The Dow Jones (DIA) rose 9.43% over three months, significantly outpacing Nasdaq's (QQQ) 6.53%. In the short term, upward momentum for DIA is strengthening, with its two-week gains expanding from 1.73% to 2.33%. Better-than-expected bank earnings reports, rising expectations of a manufacturing recovery, and a tech stock valuation correction collectively pushed capital towards more 'pro-cyclical' sectors.

The 'Great Rotation' theme persists.

At the start of 2026, the long-anticipated 'great rotation' on Wall Street continues to unfold. Market funds are shifting from the tech giants that were most favored over the past three years to 'old economy' blue-chips and industrial assets. The energy, materials, industrials, and consumer staples sectors have all risen nearly 6% since the beginning of the year, while most components of the Magnificent Seven (Mag 7) have weakened since the start of the year, highlighting a more pronounced structural divergence.

III. Market Sentiment

Overall market sentiment remains stable and slightly optimistic. Trump's comments regarding the Fed chair candidate brought short-term volatility but did not alter risk appetite. The VIX fear index closed at 15.86, up 0.13%, still within its normal range. The CNN Fear & Greed Index remained at 62, unchanged from the previous day, continuing to stay in the 'greed' zone, showing a clear recovery from 44 at the start of January.

Market breadth remains healthy: NYSE advance-decline ratio was 1.92:1, Nasdaq was 1.26:1, with more stocks advancing than declining. Trading volume reached 19.12 billion shares, higher than the 20-day average of 16.81 billion shares, indicating an increase in trading activity. In options, the CBOE equity Put/Call ratio stood at 0.77, signaling bullish sentiment remains dominant.

IV. Market Scan

1. Index ETFs

The Russell 2000 ETF (IWM) gained 0.09%, outperforming the broader market for the 11th consecutive day, confirming the ongoing 'great rotation' theme. The Dow ETF (DIA) fell 0.21%, hitting intraday lows in tandem with other major indices following Trump’s speech.

2. Industry Sectors

The real estate sector (XLRE) led gains with a 1.22% rise. Stabilizing expectations around the interest rate trajectory, coupled with the ongoing narrative of AI driving data center power demand, attracted investor attention to the real estate sector. The communication services sector (XLC) lagged, falling 0.89%, underperforming amid pressure on growth sectors.

Overall, sector divergence continues to revolve around the theme of 'old economy vs new economy': traditional sectors such as energy, industrials, and materials have performed stronger since the start of the year, while growth-leaning sectors like technology and communication services remain relatively pressured.

3. Seven Major Tech Stocks

Within the M7, divergence persists. Microsoft (MSFT) rose 0.70%, showing relative resilience despite rotation pressures. Apple (AAPL) fell 1.04%, with the market continuing to focus on the pace of its AI capital expenditure compared to peers; ahead of earnings on January 29,观望情绪 has increased. Apple's 2025 performance shows an 8.6% gain, lagging behind the S&P 500's 16.4%. Trading volume was 62% above average, indicating noticeable selling pressure.

Overall, the M7 continues to face pressure from capital outflows, with most constituents weakening since the start of the year.

4. Chinese概念股

Chinese stocks showed mixed performance. NetEase (NTES) gained 1.37%, performing relatively steadily. Alibaba (BABA) fell 3.24%, experiencing profit-taking after the launch of Qwen AI’s 'unified experience' (covering Taobao, Alipay, and travel apps), while concerns about the monetization of its core e-commerce business persist. Despite the stock pullback, Morgan Stanley maintained an 'overweight' rating and a $180 price target. Futu (FUTU) dropped 2.66%, impacted by institutional selling (OVERSEA CHINESE BANKING Corp reduced holdings by 83.3% in Q3).

5. Cryptocurrencies and related stocks

Bitcoin's latest price edged down 0.06%. Riot Platforms (RIOT) surged 16.11% to lead the market after announcing a 10-year data center lease agreement with AMD, with an initial contract value of $311 million; if AMD exercises all extension options, the deal could reach approximately $1 billion. The market views this as a significant signal of RIOT accelerating its transition from Bitcoin mining to AI data center operations.

Palantir (PLTR) fell 3.45%, with profit-taking driven by tax considerations continuing. Some investors, after a 138% rise in 2025, have delayed selling until the new year to defer capital gains taxes; meanwhile, concerns over high valuations (P/E over 400 times), combined with sector rotation from software stocks to semiconductor stocks, also continue to weigh on the stock’s performance.

$NASDAQ 100 Index (.NDX.US)$ $Invesco QQQ Trust (QQQ.US)$ $Dow Jones Industrial Average (.DJI.US)$ $State Street® SPDR® Dow Jones Industrial Average® ETF Trust (DIA.US)$ $Russell 2000 Index (.RUT.US)$ $iShares Russell 2000 ETF (IWM.US)$ $Roundhill Magnificent Seven ETF (MAGS.US)$ $USD (USDindex.FX)$ $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ $iShares 20+ Year Treasury Bond ETF (TLT.US)$ $XAU/USD (XAUUSD.CFD)$ $CBOE Volatility S&P 500 Index (.VIX.US)$ $Bitcoin (BTC.CC)$ $BTC/USD (BTCUSD.CC)$ $Ethereum (ETH.CC)$ $ETH/USD (ETHUSD.CC)$ $iShares Ethereum Trust ETF (ETHA.US)$ $NVIDIA (NVDA.US)$ $Tesla (TSLA.US)$ $Meta Platforms (META.US)$ $Amazon (AMZN.US)$ $Alphabet-C (GOOG.US)$ $Microsoft (MSFT.US)$ $Apple (AAPL.US)$

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