January was a battle between high quality stocks and lower quality stocks. Lower quality stocks won. That includes small and micro caps. (Our view is that the primary small cap stock index, the Russell 2000, is a low-quality index. About 40% of stocks in the index do not post a profit, and many are overleveraged financed by junk debt).
Returns for the month of January:
Russell 2000 3%
Equal Weighted S&P 500 3.1%
S&P 500 1.4%
Mag 7 0.0%
The equal weighted S&P 500 was a pleasant surprise. It outperformed the market cap weighted S&P 500. It shows the market is broadening out for large caps. The mega-cap Mag 7 was a disappointment with a zero return. We don’t expect that to continue (see main section).
Gold and silver crashed on Friday after a historic run higher. Gold was down 10% and silver 25% in one day! Both are small markets. It doesn’t take much buying or selling to move prices. Investors/speculators learned that on Friday the hard way. To paraphrase Warren Buffet; in order to make money in gold you must think future buyers will be more afraid than you.
Since inauguration day, European stocks have outperformed U.S. stocks, including in January. Before you think you are missing something, this is the first time this has happened in nearly 20 years!
EARNINGS GROWTH OR MULITPLE EXPANSION
Valuations are a horrible market timing tool for those investors who believe in market timing. If indeed this market is expensive, it can stay that way for a long time. But as we point out below, we think market valuations are justified.
Investors are willing to pay a premium for quality and certainty. Quality is often defined as a high return-on-equity and high net profit margins. The result is P/E multiple expansion. As margins expand (as they have) multiples drift higher. Is this a sign of a bubble? No. Why? Because earnings are soaring.
This is especially true for the Mag 7. It is not P/E multiple expansion for the Mag 7 that drove them higher last year. Only two of the Mag 7 stocks saw multiple expansion in 2025 – Google and Tesla. (We are especially interested in the Mag 7 as our clients own six of the seven.) Earnings are driving tech, including AI, in this market, not multiple expansion. When earnings are driving returns, it is hard to have a bubble.
Let’s look at the numbers. Corporate earnings for the S&P 500 are still expected to grow 15% in 2026. Tech, however, is expected to grow earnings at 28.5%. Wow! It is tough to bail on tech with that growth.
Is it time for the Mag 7 to make the hand-off to the S&P 493? Not necessarily, but it sure is nice to see the market broadening in the last few months. Could both the Mag 7 and the S&P 493 drive returns higher? We think so. But tech is still ruling the roost on EPS growth. Tech is here to stay and is not in a bubble, in our view.
First it was the hyperscalers with huge capex budgets (primarily for the data centers) that led tech stocks. Then it was show-me-the-money stocks with ROI (return on investment) being the stat of choice. Now it is show-time. Companies across multiple sectors need to show the benefits of using AI (including productivity gains and margin expansion). Financial, industrial and healthcare stocks are sectors poised to benefit.
The biggest risk to stocks this year, in our opinion, is earnings not coming through. Or if they do, are great earnings already discounted in share prices? We don’t think so. The investment backdrop is still positive as earnings growth and a supportive Fed keep recession odds low. Risk on.