It was a weird week. Honestly, if you just looked at the Friday closing numbers, you might think the market was taking a nap. But beneath the surface of the major indexes, there was a massive tug-of-war going on between old-school banks and the high-flying tech giants we’ve all grown to love (or hate).
Basically, the big story for this week in the stock market wasn't the headline decline—the S&P 500 and Nasdaq both slipped less than 0.1%—but rather the "Great Rotation" that finally seems to have some legs. While the "Magnificent Seven" types were catching their breath, small caps were absolutely on fire. The Russell 2000 outperformed the S&P 500 for 11 straight sessions ending this Friday. To put that in perspective, that’s a winning streak we haven't seen since 1990.
The Banks Saved the Day (Mostly)
The unofficial start of earnings season kicked off, and for once, the "suits" didn't disappoint. We saw a parade of big-name financials like JPMorgan Chase, Bank of America, and Wells Fargo reporting their fourth-quarter 2025 numbers.
Goldman Sachs (GS) was the standout, jumping 4.6% after reporting a massive earnings beat of $14.01 per share. Analysts were only expecting $11.77. Morgan Stanley (MS) followed suit with its own beat. It's kinda funny because, for most of 2025, people were worried that the high-interest-rate environment would eventually crush these lenders. Instead, they’re entering 2026 with what PNC Financial CEO Bill Demchak called "great momentum." PNC actually hit a four-year high this week after they topped estimates and announced they’re upping their share buybacks.
But it wasn't just about the money they made; it was about the outlook. Banks are benefiting from a "normalization" of the economy. Loan losses are staying low—PNC’s provision for credit losses actually dropped—and they’re finally seeing the fruit of all those AI investments they’ve been bragging about for years.
The Semiconductor Rollercoaster
If you own chip stocks, you probably had some mild whiplash this week.
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Early in the week, everything felt a bit shaky. Then Thursday happened. Taiwan Semiconductor Manufacturing Company (TSM) dropped a "blowout" earnings report that sent the whole sector into a frenzy. TSM shares jumped 4.4% after they announced plans to spend up to $56 billion on capital expenditures in 2026, much of it right here in the U.S.
That single report acted like a shot of adrenaline for Nvidia (NVDA) and Micron (MU). However, the joy was a bit lopsided. While the hardware guys (the semis) were rallying, software companies like Palantir (PLTR) and Workday (WDAY) were getting dragged. There’s a growing fear among investors that while chip makers are getting rich building the AI "pipes," the software companies might actually get disrupted by the very technology they’re trying to sell.
Adam Turnquist over at LPL Financial noted something interesting, though. He mentioned that the ratio of software stocks to semiconductors is now "oversold" and hitting support levels we haven't seen since the early 2000s. Basically, if you’re looking for a contrarian play, software might be looking cheap compared to the white-hot chip sector.
Inflation and the "Fed Feud"
We can't talk about this week in the stock market without mentioning the Federal Reserve. It’s the topic that just won't die.
The December Consumer Price Index (CPI) came out, and it was... okay? Headline inflation is sitting around 2.6% to 2.7% year-over-year. That’s a far cry from the 9% nightmare of a few years ago, but it’s still not the 2.0% the Fed dreams about.
There was also some drama on Monday. News broke that the Justice Department had served subpoenas to the Fed regarding renovations at their headquarters. It sounds like a boring real estate story, but in the world of high finance, any hint of legal trouble at the Fed makes traders jumpy.
Plus, there's the looming "Powell Exit." Chair Jerome Powell’s term ends in May, and the White House is already floating names like Kevin Hassett and Kevin Warsh. Both are seen as more "dovish," meaning they might want to cut rates faster than the current board. But J.P. Morgan’s chief economist, Michael Feroli, threw cold water on that idea this week. He thinks the Fed might not cut rates at all in 2026 and could even hike them in 2027 if the labor market stays this tight.
What Most People Are Missing
You’ve probably heard people saying the market is "overvalued." And yeah, on a P/E basis, it’s not exactly a bargain. But look at the corporate bond market.
Companies issued about $435 billion in bonds in just the first half of January. That is a record. If the "smart money" in the credit markets was terrified of a recession, they wouldn't be buying up all this debt at such narrow spreads. Investors are essentially betting that the "soft landing" isn't just a myth—it’s actually happening.
Also, don't ignore the geopolitical noise. Between the government shutdown recovery and tensions in the Middle East affecting oil prices (WTI crude dropped over 4% on Thursday), there are plenty of reasons to be cautious. But the market seems to be looking past the headlines and focusing on the bottom line.
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Actionable Next Steps for Your Portfolio
So, what do you actually do with all this?
- Check your tech weight. If your portfolio is 90% AI chips, you had a great week, but the "software-to-semis" gap suggests a rotation might be coming. It might be time to look at those beaten-down software names.
- Don't sleep on the banks. Earnings season just started, and the financials are showing they can handle this "higher for longer" rate environment better than expected.
- Watch the small caps. The Russell 2000's record-breaking streak is a sign that the "average" company is finally starting to participate in this bull market, not just the tech titans.
- Re-evaluate your cash. If J.P. Morgan is right and rates stay steady through 2026, those high-yield savings accounts and money market funds aren't going to lose their luster as fast as people thought.
Keep an eye on the retail sales and industrial production data coming out next week. That’ll tell us if the consumer is actually still spending or if they’re just putting everything on a credit card they can't afford to pay off.
Next Steps for You:
You should review your current sector allocation, specifically your exposure to the Russell 2000 vs. the Nasdaq 100. If you are heavily skewed toward large-cap tech, consider if the current 11-day small-cap outperformance warrants a rebalance to capture the broadening market breadth. Additionally, monitor the upcoming earnings from mid-tier regional banks next week to see if the positive trend started by PNC and JPMorgan holds across the broader financial sector.