Stocks took a breather this week, dragged down by rapidly changing policies in the White House catching Wall Street off guard.
The S&P 500 tumbled 0.4% this week, putting its annual gains at 1.4% — which still marks its best start to a year since 2023 when AI unleashed a monster rally in tech stocks.
What’s different this time is that last year’s laggards are leading the way this year, instead of the typical tech stocks. Cyclical sectors like industrials, energy, and materials are the top performers in 2026 so far, up 7.6%, 6.8%, and 7.2%, respectively. That has led some investors to question whether the market can extend its gains without the likes of tech stalwarts.
“The ones that had been showing really good strength over the last few months, meaning healthcare, technology, have all been lagging,” said Fundstrat Head of Technical Strategy Mark Newton during our weekly huddle. “I would say there’s an increasing amount of bifurcation right now between large-cap technology and the broader market.”
Newton expects that stocks will have a “pretty decent performance” over the next month, but his work calls for markets to start to turn down in the spring. He added that it’s “possible if tech can’t really manage a very strong rebound off these levels.”
Investors were laser-focused this week on a flurry of news coming out of the White House. Head of Research Tom Lee identified four losers from White House-related news so far: (1) credit card companies, from a proposal to cap interest rates charged on credit cards at 10% (2) the Federal Reserve from a criminal investigation into the Fed Chair Jerome Powell (3) institutional buyers of residential homes from a proposed ban on them from buying single-family homes (4) mortgage rates from an announcement that Fannie Mae and Freddie Mac would buy $200 billion of mortgage bonds.
“Washington is picking the winners and losers,” Lee said. “It’s tough to buy things that Washington decides are losers.”
Lee encouraged investors to look at how earnings growth is accelerating. Analysts surveyed by FactSet expect earnings for companies in the S&P 500 to rise 8.2% in the fourth quarter from a year earlier, the tenth consecutive quarter of year-over-year earnings growth for the index.
Blockbuster earnings from Taiwan Semiconductor Manufacturing Co. reinforced the AI boom even for U.S. stocks, allowing chip makers to recover some. Advanced Micro Devices shares rallied 8.2%, Intel added 27%, and Broadcom increased 1.6%.
“TSMC is the first of the AI-related names to report earnings this season and it’s been so good, honestly,” said Head of Data Science “Tireless” Ken Xuan. “It almost looks like it’s too good to be true.”
Lee believes stocks have a lot of upside left before hitting his year-end price target of 7,700, especially because stocks inched higher during the first five days of the year, which is typically a positive omen for future performance.
Chart of the Week
In economic data, the consumer-price index report showed that prices in December rose 2.7% from the prior year, while core prices rose 2.6%. Fundstrat Head of Research Tom Lee said “that’s really soft.” Meanwhile, the December producer-price index report showed that inflation rose 3% from the year before. Head of Data Science “Tireless” Ken Xuanbelieves that means “there’s almost no chance for a cut” because “nothing has changed to the picture for the next FOMC meeting.” Traders in the futures markets are pricing in a 95% chance that the Fed keeps rates steady next week.
Todays biggest technical development is happening not in the stock market, but rather the Bond market on signs that the Administration hinted that Kevin Hassett might be out of the running for FOMC chair. Bond yields have pushed sharply higher and both 5, and 10, year Treasury yields are breaking out of their recent ranges. This looks important in the near-term and could result in TNX rising up to 4.35%, or another 10-15 bps higher very quickly.
Stock indices are mildly positive, but there remain issues which are preventing SPX and QQQ from accelerating, and within Technology, that problem continues to be falling Software issues. Today is a prime example of this given a 1.2% rise in SOX while IGV -1.47% the Ishares Software ETF, has just undercut November lows to hit the lowest levels since Spring 2025. (shown below) IGV drop is being led by TEAM -7.71% APP -6.52% TRMB -5.96% BRZE -9.65% which are all down more than 6%. Note, as discussed in recent notes, Software remains out of favor and should be underweighted within a Technology portfolio until this group can show evidence of bottoming out. I expect that the break of Nov 2025 lows, if not immediately recouped, would keep Software stocks under pressure in the short run and lead IGV down to the low $90’s before this stabilizes and bounces.
GEV 6.12% (GE Vernova) looks like one of the better risk/rewards structurally following this week’s success in climbing back over the minor downtrend which has been in place since 12/10/26. This initially broke out of its multi-month range in December and now that consolidation looks complete. I expect a coming push up to challenge and break $725 on the upside which could help this eventually climb to $807 which looks important as an alternate 100% projection of the rally which initially started in November. This is an UPTICKS holding and i feel it’s a great risk/reward here for a push back to new highs.
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