Executive Summary
January Market Performance Overview
The S&P 500 delivered a +1.5% total return in January, outperforming investment grade corporate bonds, long-term Treasuries, and T-bills, but lagging both ex-US equities and gold. The VIX rose 16.7% amid geopolitical uncertainty, yet the market showed resilience with 59% of stocks outperforming the index versus just 29% in full year 2025.
The most significant development was the equal-weighted S&P 500's +3.4% performance, nearly doubling the cap-weighted index. The Nifty 50 mega caps gained only +0.2% while the Other 450 rose +3.2%, demonstrating a clear rotation away from concentrated positions. Ex-US equities particularly shone, gaining +6.0% in USD terms, while gold posted its strongest January in over a decade at +14.1%.
Sector Rotation: Energy Leads, Tech Lags
Seven of eleven sectors outperformed the S&P 500, with Energy's +14.4% leading the pack. The sector benefited from higher oil prices offsetting geopolitical uncertainty around Venezuela, Iran, and Greenland tensions. Materials followed with +8.6%, driven by metals and mining stocks, while Consumer Staples posted +7.5% and Industrials +6.6%.
Technology's -1.7% decline and Financials' -2.6% loss marked the month's worst performers. Within Technology, Software plunged -14.4% while Hardware also struggled. The Financial sector's weakness was concentrated in Capital Markets and Consumer Finance subsectors.
| Sector | 1M Return | Weight | Status |
|---|---|---|---|
| Energy | +14.4% | 3.2% | Leading |
| Materials | +8.6% | 2.0% | Outperform |
| Consumer Staples | +7.5% | 5.0% | Defensive Strength |
| Industrials | +6.6% | 8.6% | Broadening |
| Communication Services | +5.7% | 11.0% | Mixed |
| Information Technology | -1.7% | 33.4% | Lagging |
| Financials | -2.6% | 12.9% | Underperform |
Value vs Growth: A Decisive Shift
January witnessed a decisive rotation from Growth to Value across all market capitalizations. The Russell 1000 Value Index's +4.5% return trounced the Russell 1000 Growth Index's -1.5% decline, creating a 600 basis point spread that marked Value's strongest relative start to the year in recent memory.
Interestingly, while Value indices outperformed, Growth factors actually led on average (+4.2%) versus Value factors (+3.4%). This apparent contradiction was driven by Upward Estimate Revisions (+7.0%) and High Duration (+4.1%) factors performing well. Among Value factors, Low EV/EBITDA and Low Price/Cash Flow both posted +5.3%, while Low Price/Book gained +4.8%.
"Following a year of Low Quality leadership, High Quality led in January opposite the seasonal trend. B+ or Better stocks by S&P Quality rank gained +3.5% versus +2.2% for B or Worse stocks."
Small Caps Stage Strong Comeback
The Russell 2000's +5.4% total return marked its best January since 2023 and its best relative start versus the Russell 1000 since 2021. Small cap Value particularly shone with +6.9%, dramatically outperforming Small cap Growth's +4.0%. This 290 basis point spread suggests investors are rotating into cheaper, more defensive small cap names.
Within small caps, Energy, Materials, and Industrials were the best performers, while all sectors finished positive for the month. The Russell MidCap gained +3.1%, with MidCap Value (+4.3%) significantly outperforming Growth (-0.9%).
| Size | Value | Growth | Spread |
|---|---|---|---|
| Russell 1000 | +4.5% | -1.5% | +600 bps |
| Russell MidCap | +4.3% | -0.9% | +520 bps |
| Russell 2000 | +6.9% | +4.0% | +290 bps |
Factor Performance Analysis
High Foreign Exposure emerged as January's top-performing factor at +13.6% for the top decile, aligning with strong ex-US equity returns. Momentum factors also performed well, with the 5-week/30-week Relative Strength strategy gaining +11.5% and Price/200-Day Moving Average up +10.9%.
Upward Estimate Revisions, a Growth factor, delivered +7.0% returns as analysts began upgrading expectations. The 3-month Earnings Revision Ratio improved to 1.2x from an average of 0.9x, while the Sales Revision Ratio rose to 1.5x versus an average of 1.1x. The Guidance Ratio stood at 1.7x, well above the historical average of 0.8x.
- Foreign Exposure Dominates: The top decile of High Foreign Exposure stocks gained +13.6%, benefiting from a weaker dollar and strong international growth.
- Momentum Strategies Work: Multiple momentum indicators posted double-digit returns, with technical factors broadly outperforming in the volatile January environment.
- Value Factors Solid: Despite Growth factors' average outperformance, individual Value factors like Low EV/EBITDA and Low P/CF posted strong +5.3% gains.
- Quality Reversal: High Quality stocks outperformed for the first time in months, suggesting a shift toward defensive positioning.
Estimate Revisions Turn Positive
The improvement in estimate revisions provided a supportive backdrop for equity markets. The 1-month Earnings Revision Ratio reached levels consistent with positive earnings momentum, while the 3-month ratio's rise above 1.0x suggested sustained improvement in analyst sentiment.
Particularly notable was the surge in positive guidance, with companies providing upbeat outlooks at nearly twice the historical rate. This trend, if sustained, could support further equity gains as Q1 2026 earnings season approaches.
Investment Conclusion
January 2026's market action represents a potentially significant inflection point for equity markets. The equal-weighted S&P 500's dramatic outperformance signals that the narrow leadership of 2025 may be giving way to broader participation. With 59% of stocks beating the index versus just 29% last year, the breadth improvement is undeniable.
The rotation into Value, small caps, and defensive sectors suggests investors are positioning for a different market regime. Energy's +14.4% surge and Technology's -1.7% decline mark a stark reversal from recent trends. Similarly, the Russell 2000 Value's +6.9% gain and Small cap Growth's relative underperformance indicate a preference for cheaper, more established businesses.
For investors, this environment favors diversification away from mega-cap growth and toward broader market exposure. The outperformance of equal-weighted strategies, Value factors, and international exposure all point to opportunities beyond the Magnificent 7. With estimate revisions turning positive and quality stocks beginning to lead, the foundation exists for sustained broadening if geopolitical risks remain contained.
Key sectors to watch include Energy (benefiting from geopolitical supply concerns), Materials (driven by commodity strength), and Industrials (leveraging infrastructure spending). Conversely, Technology faces headwinds from valuation compression and Software weakness, while Financials must navigate concerns around capital markets activity. The best risk-reward may lie in previously overlooked areas where valuations remain reasonable and quality is improving.
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