Near the Highs, But Not All In: Markets Rotate as 2026 Begins

The first full trading week of 2026 opened with a heavy news flow and a deceptively calm market surface. Major indexes held near record territory, but beneath the headlines the tape told a more nuanced story of rotation, waning growth momentum, and selective risk appetite. The S&P 500 hovered just below the 7,000 level and flirted with fresh all-time highs, while the Dow Jones Industrial Average pushed to new records. The Nasdaq lagged, extending a divergence with the S&P 500 that has become one of the most important signs of diminishing risk appetite since late last year.

That divergence spoke volumes about leadership. While the S&P’s advance was driven by financials, industrials, and defensive cyclicals, the Nasdaq’s underperformance reflected continued pressure on mega cap growth. Several of last year’s most dominant technology leaders failed to participate meaningfully in the rally, reinforcing the idea that investors are shifting away from long duration growth toward value, cash flow, and balance sheet resilience. This tilt away from growth has been building since late 2025, and the first week of January did little to disrupt it.

Labor and inflation signals helped frame that rotation. ADP reported that private employers added 41,000 jobs in December, an improvement from November’s revised decline but still a subdued pace by historical standards. Wage growth held steady at 4.4% year over year, suggesting that labor cost pressures continue to gradually cool. At the same time, the New York Fed’s one year consumer inflation expectations rose to 3.4% in December from 3.2%, while longer term expectations remained anchored. Together, these data points pointed to an economy that is slowing but not breaking, and to inflation pressures that are easing but still felt by households.

Financials were among the strongest performers in the S&P 500, supported by a modest steepening of the yield curve and confidence that net interest margins can remain healthy even if rate cuts come later in 2026. Industrials and defense-related names also found a bid, helped by renewed political focus on military spending and infrastructure. Healthcare held up well as investors leaned into earnings durability and lower sensitivity to economic swings. Technology, by contrast, lagged, with particular weakness in memory and storage exposed stocks as investors reassessed capital spending sensitivity and took profits after a strong prior year.

That reassessment was visible during CES 2026. The conference delivered no shortage of headlines around artificial intelligence platforms, devices, and next generation hardware, but the market reaction was selective. Rather than lifting the entire technology complex, trading during CES week favored differentiation and punished crowded exposures. This dynamic reinforced Nasdaq’s inability to confirm the S&P’s highs and underscored growing fatigue with broad-based AI positioning.

The divergence extended beyond equities. Bitcoin weakened during the week and pulled back from recent highs, underperforming broader risk assets. For many investors, bitcoin has become a proxy for speculative and growth-oriented risk appetite. Its softness alongside Nasdaq underperformance reinforced the sense that markets are becoming more cautious about long duration growth and liquidity sensitive assets, even as headline equity indexes remain elevated.

Adding another layer of complexity, President Trump generated market moving headlines with calls for expanded military spending, proposed restrictions on private equity ownership of single-family homes, and demands that Fannie Mae and Freddie Mac purchase $200 billion of mortgage backed securities to support the housing market. These proposals injected uncertainty into housing finance and fiscal expectations while contributing to strength in defense and industrial names. Separately, attention grew around a pending Supreme Court decision on tariffs, with investors weighing whether a ruling could ease trade barriers and support exporters or preserve uncertainty around supply chains and pricing.

Looking ahead, the key macro catalyst today is the December jobs report. Consensus expectations center on moderate payroll growth and a steady unemployment rate. A stronger than expected report would likely reinforce the growth versus value split, pressuring long duration assets and potentially widening the Nasdaq and S&P divergence as yields firm. A weaker print, particularly if accompanied by softer wage growth, could revive rate cut optimism and support cyclicals and financials, even if it raises questions about growth durability.

The takeaway from the week is that markets are not complacent, but rather selective. Indexes may be near record levels, but leadership is narrow, appetite for growth is cooling, and signals from technology, crypto, and sector rotation all point toward a more cautious and value-oriented phase. As early 2026 data rolls in, the next leg for equities will likely depend less on headline highs and more on whether growth assets can regain traction or whether value continues to quietly take the baton.

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Data contained herein is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. All events and times listed are subject to change without notice.