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Epic Market Rotation or Dangerous Crack? What Last Week's Split Tape Means for Investors

MarketDash Editorial Team
9 hours ago
The Dow climbed while tech tumbled last week, signaling a potential rotation into small caps and value sectors. We break down three stocks positioned to benefit from this shift—plus key market catalysts to watch as we head into 2026.

Last Week's Market Split: A Tale of Two Tapes

Last week gave us one of those market sessions that makes you wonder if different indices are watching entirely different economies. The Dow Jones finished up 1.05%, looking perfectly content with itself. The S&P 500 actually hit a new high during the week but couldn't hold it, closing down 0.63% by Friday. And then there's the Nasdaq, which took it on the chin with a 1.62% decline as tech stocks got hammered.

But here's where it gets interesting. While the big tech names were bleeding, small caps were having a party. The Russell 2000 hit new all-time highs, and not just barely—it broke out convincingly. This index has substantial exposure to financials, healthcare, and industrials, which are suddenly looking a lot more attractive than they did a few months ago. Meanwhile, crypto had a rough week, though silver managed to hit another all-time high. And despite the Fed cutting rates, risk assets didn't exactly soar into the stratosphere.

So what's happening here? Is this a dangerous crack in the bull market, or are we watching an epic rotation that could define 2026? Let's dig into three stocks that could benefit from this shift, and then look at the market catalysts that'll matter most in the weeks ahead.

Three Stocks Positioned for the Rotation

Invesco: Riding the Asset Management Wave

Invesco Ltd. (IVZ) is a global investment management firm that offers everything from ETFs and mutual funds to alternative investments across equities, fixed income, and multi-asset strategies. Think of them as the infrastructure provider for the wealth management boom that's been building for years.

The Current Situation

The company just posted quarterly revenue of $1.19 billion and earnings of $275.4 million. The valuation looks solid here: P/E sits at 17.56, Price-to-Sales is 1.87, and EV to EBITDA comes in at 9.61. From a technical perspective, IVZ recently broke out from an ascending triangle formation, which typically signals continuation of the underlying bullish trend.

Why This Matters Now

Invesco is capitalizing on the asset management industry's resurgence in a big way. The company delivered record Q3 2025 net long-term inflows of $28.9 billion, driven by strength across ETFs & Index, their China joint venture and India operations, Fundamental Fixed Income, and Private Markets. That's not just good—it's exceptional organic growth in an environment where global markets are rising and investor confidence is returning.

The assets under management story is even more compelling. Ending AUM surged to $2.125 trillion, representing a 6.2% quarter-over-quarter increase. This scale matters enormously because fee-based models thrive in this environment, creating a powerful revenue flywheel as more assets flow in.

Invesco's strategic focus on high-growth regions diversifies their revenue beyond traditional Western markets. The China joint venture and India operations provide emerging market exposure right as those economies are attracting more global capital. Meanwhile, their booming ETF and private markets segments tap into the secular shift toward passive strategies and alternatives—exactly where investor preferences are heading.

For income-focused investors, Invesco declared a quarterly dividend of $0.21 per share, up 2.4% from prior levels. That translates to a sustainable 3.49% yield, with management targeting normalized payout ratios around 40%. This balance between growth investments and consistent capital returns makes the story even more attractive.

The analyst community is neutral here, with Goldman Sachs rating it Neutral, RBC Capital at Sector Perform, and Barclays at Equal-Weight. Sometimes neutral ratings are exactly what you want—they suggest the street hasn't fully caught on yet.

The Trade Setup (61% Return Potential)

I'm bullish on IVZ above the $22.00-$23.00 range. My upside target sits at $42.00-$43.00, representing roughly 61% potential return from current levels.

Oceaneering International: Offshore Energy's Hidden Gem

Oceaneering International, Inc. (OII) provides engineered services and products for the offshore energy industry. They specialize in remotely operated vehicles, subsea robotics, asset integrity management, and advanced technologies for both traditional oil and gas operations and renewable energy applications.

The Current Situation

Last quarter showed $742.9 million in revenue and $44.76 million in earnings. The valuation is compelling: P/E of just 11.81, Price-to-Sales at 0.97, and EV to EBITDA at 7.08. Technically, OII recently broke out from a saucer formation, and these patterns typically lead to accelerating upside momentum.

Why This Matters Now

Oceaneering is riding sustained offshore energy demand beautifully. Q3 2025 showed revenue climbing 9% to $743 million, while net income surged 73% to $71.3 million. This performance came from strong asset utilization and operational efficiencies in a stabilizing oil market with rising deepwater exploration activity.

The backlog story provides excellent revenue visibility going forward. Oceaneering recently won a multi-year contract from bp Mauritania for inspection, maintenance, and repair services in the Greater Tortue Ahmeyim field. They also secured a vessel services agreement for the MPSV Harvey Deep Sea running through 2027. These aren't one-off projects—they're steady streams of high-margin work in both emerging and established basins.

Innovation gives Oceaneering a competitive edge that's hard to replicate. The company launched Vision™ Subsea, a cloud-based module for 3D data visualization and remote integrity assessments. This extends their digital solutions into underwater environments, letting operators optimize asset management with engineering-grade insights while reducing operational risks. In a sector increasingly focused on efficiency and sustainability, this matters tremendously.

The diversified segment strength provides resilience beyond just oil prices. With contributions from subsea robotics, offshore projects, and manufactured products, plus expansion into aerospace, defense, and renewables, Oceaneering has built a portfolio that can weather volatility in any single market.

Analyst sentiment here includes TD Cowen at Hold, Barclays at Equal-Weight, and Citigroup at Neutral. Again, we're seeing a street that hasn't fully embraced the story yet.

The Trade Setup (34% Return Potential)

I'm bullish on OII above the $23.00-$24.00 zone. My upside target is $35.00-$36.00, offering approximately 34% return potential.

Xometry: Revolutionizing Custom Manufacturing

Xometry, Inc. (XMTR) operates an AI-powered online manufacturing marketplace that connects buyers with a global network of suppliers for custom parts and assemblies. They offer instant pricing and lead times for services like CNC machining, 3D printing, and injection molding.

The Current Situation

Last quarter delivered revenue of $180.72 million and earnings of $6.21 million. The valuation is admittedly steep, with Price-to-Sales at 4.56 and Book Value at just 5.31. But growth stories often command premium valuations. Technically, XMTR just broke higher from a symmetrical triangle formation, which usually signals trend continuation to the upside.

Why This Matters Now

Xometry is tackling a massive opportunity: the fragmented $275 billion custom manufacturing market. Their AI-powered marketplace connects buyers and suppliers for instant quoting and seamless sourcing across industries like aerospace, automotive, and medical devices. This digital transformation narrative is accelerating as companies demand more resilient supply chains and ESG transparency.

The revenue acceleration is genuinely explosive. Q3 2025 revenues surged 28% year-over-year to a record $181 million, with marketplace growth hitting 31%—outpacing prior quarters and beating internal guidance. This performance came despite a challenging manufacturing macro environment, which makes it even more impressive. The network effects are kicking in, creating recurring business that should sustain double-digit expansion well into 2026.

The path to profitability showcases a maturing business model. Xometry achieved record marketplace gross margins of 35.7% and adjusted EBITDA of $6.1 million in Q3 2025, representing a $6.8 million improvement from last year. Management raised full-year guidance to $676-678 million in revenue and $16-17 million in EBITDA, demonstrating scalable economics and cost discipline. This is the transformation from high-growth disruptor to reliable earnings generator.

Product innovation is deepening Xometry's competitive moat rapidly. Recent launches include the Workcenter mobile app for suppliers, U.S. auto-quoting for injection molding, and AI-powered design tools that slash quoting times from days to minutes. These enhancements boost conversion rates and extend the platform's reach into high-volume production, making it increasingly indispensable for global manufacturers navigating digital supply chain shifts.

The Street is split here: JP Morgan rates it Overweight, while both Goldman Sachs and Cantor Fitzgerald sit at Neutral. The divergence suggests there's still debate about valuation versus growth trajectory.

The Trade Setup (89% Return Potential)

I'm bullish on XMTR above the $48.00-$50.00 range. My upside target is $110.00-$112.00, offering roughly 89% return potential for those willing to stomach the volatility that comes with high-growth names.

Market Catalysts That Matter This Week

The Fed's Internal Division Problem

The Federal Reserve wrapped up its final meeting of the year by cutting the target range for the federal funds rate by 25 basis points to 3.50%-3.75%. This marked the third consecutive rate cut, justified by a weakening labor market and inflation that remains slightly elevated but moving in the right direction.

The official statement noted that economic activity continues expanding at a solid pace, with job gains staying strong even as unemployment edges up to a projected 4.5% for 2025. Inflation should moderate gradually toward the 2% target. But here's the hawkish twist: the median participant now forecasts only one additional rate cut in 2026.

The bigger story is the division within the Fed itself. Three members dissented—one wanted a 50-basis-point cut, while two preferred no change at all. That's a pretty wide range of opinion for a committee that usually likes to project unity. Fed Chair Jerome Powell emphasized a data-dependent approach, signaling potential pauses in easing based on incoming labor and inflation data. He also announced plans to purchase shorter-term Treasury securities to maintain ample reserve levels.

This matters because a divided Fed is a Fed that might struggle to respond quickly to changing conditions. Keep a close watch on bond market ratios and liquidity indicators in the weeks ahead.

Small Caps Are Having Their Moment

While large cap indices spun their wheels last week, the small-cap Russell 2000 broke out to a new all-time high. This isn't just a one-day pop—it looks like 2026 could shape up to be a year where small caps finally outperform after years of lagging their large-cap cousins.

The tailwinds make sense. Lower interest rates from recent Federal Reserve cuts ease refinancing burdens on these companies, which often carry floating-rate debt that makes them especially rate-sensitive. There's also a surge in mergers and acquisitions activity, particularly in biotech, combined with a rebounding IPO market. This should unlock undervalued assets and attract fresh capital inflows.

Broader economic trends favor small caps too. Domestic reshoring benefits U.S.-focused companies disproportionately, and a "soft landing" economic scenario that avoids recession plays perfectly into the small-cap playbook. The biggest sectors in the Russell 2000 include financials, industrials, and healthcare—exactly the themes that look poised to accelerate in 2026.

Reading the Sector Tea Leaves

Since we're on the final stretch of the year, let's tighten up the timeframe for measuring sector performance. The market's been volatile since October, and the current rankings tell a clear story about where money is flowing.

The top-performing sector since the start of Q4 has been healthcare. In second place, we see financials, which have climbed nicely as the yield curve has been steepening. A steeper yield curve means banks can borrow short and lend long more profitably—basic banking 101.

Tech's position in the middle of the pack since Q4 began is slightly concerning, but it's not time to panic yet. What's more encouraging for bulls is seeing utilities and consumer staples hovering near the bottom. When defensive sectors lag, it usually means investors are comfortable taking risk.

Looking at different timeframes, we see some interesting patterns emerging. Over one week, materials have shown strength. Over three weeks, consumer discretionary is coming on strong. Over 13 weeks (basically since Q4 started), healthcare leads. And over 26 weeks, technology still holds the crown.

The recent strength in materials and consumer discretionary sends a mixed signal. Materials strength could indicate commodity inflation expectations, while consumer discretionary strength suggests confidence in consumer spending. Both can't necessarily be true at the same time without creating tension somewhere in the market.

The AI Trade Is Still Alive

The ratio between semiconductors and the Nasdaq 100 is one of the most important metrics for measuring the health of the AI theme. This matters because chips are the foundation of the entire AI revolution—none of it would be possible without ever-increasing computing power.

But here's the real insight: chips tend to lead even more than the broader tech sector. They outperform to the upside when tech is healthy, and they outperform to the downside when tech is struggling. It's a leading indicator wrapped inside a sector.

Fortunately for bulls, this ratio recently experienced a clean breakout from a wedge pattern and successfully retested former resistance that's now turned into support. As long as this ratio continues climbing, the bull market has room to run. The recent retest and bounce suggest the AI trade is far from over, despite the narrative that it might be getting tired.

DeFi's Moment May Be Coming

Cryptos have taken a beating over the past couple of months, but underneath the surface carnage, there appears to be a massive realignment taking place. Look at the ratio between Ethereum and Bitcoin.

Since April, Ethereum has been outperforming Bitcoin by a wide margin. Yes, there was a pullback in the ratio from August into November's low, but that completed a higher-low, which arguably reestablishes a new uptrend.

We're now looking at a rounding bottom formation in this chart. If this breaks above the upper horizontal trendline of the pattern, it would confirm that Ethereum is set to outperform Bitcoin substantially going forward. This matters because Ethereum represents the decentralized finance ecosystem, while Bitcoin is increasingly viewed as digital gold. If DeFi is coming back into favor, it suggests risk appetite in crypto is improving beyond just the "safe" play.

Bond Market Liquidity Is the Key

The Fed cut rates last week, but the most important thing to watch now isn't the rate cut itself—it's how bond markets respond. Long-term rates look like they want to keep climbing for another month or so, but I'm more focused on liquidity conditions.

Consider the ratio between junk debt and 3-7 Year Treasuries. We want to see junk bonds outperforming Treasuries to signal healthy liquidity and risk appetite. The more this ratio climbs, the better liquidity conditions become.

Right now, this ratio is consolidating near resistance of a saucer formation. If we see a breakout here, which I'm expecting, watch for a significant breakout in stocks to new all-time highs. The two tend to move together because they're both measuring the same thing: whether investors are comfortable taking credit risk.

While liquidity conditions look poised for massive improvement in the near term, we need to monitor whether inflationary pressures creep back into the market. If inflation resurges, this ratio should start to drop as investors flee risk. In that scenario, expect the Fed to become much more aggressive with rate cuts. But for now, they're trying to narrow spreads with minimal intervention—which is exactly what you want to see in a healthy market.

What's Happening in Crypto

Bitcoin rallied to take out the previous week's high before facing selling pressure after the Fed cut rates. In theory, more liquidity should be a tailwind for crypto, but there are serious technical headwinds to overcome.

First and foremost, the trend is now to the downside. Bitcoin keeps making lower lows and lower highs, and until we see this reverse, bulls will struggle to reestablish momentum. At this point, the best bet is watching for a higher low on this pullback.

Another concern is that the recent rally could be interpreted as a corrective move within a rising channel—not a reversal. However, there's a resistance zone in the $94,000-$95,000 area that, if cleared, should lead to a rally up to the $105,000 zone. This is the key level to watch in the near term. A break above that resistance would suggest the correction is over and the uptrend is resuming.

The Bottom Line

Last week's market action wasn't random noise—it was the beginning of what could be a significant rotation from mega-cap tech into small caps and value sectors. The Russell 2000's breakout to new highs, combined with strength in financials and healthcare, suggests this shift has legs.

The three stocks highlighted here—Invesco, Oceaneering International, and Xometry—are positioned to benefit from different aspects of this rotation. Invesco plays the asset management boom and small-cap resurgence. Oceaneering captures offshore energy's revival with attractive valuation. And Xometry is revolutionizing a massive manufacturing market with impressive growth metrics.

The key question is whether this rotation represents a dangerous crack in the bull market or an epic shift that defines 2026. Based on the evidence—improving credit spreads, a healthy semiconductor-to-Nasdaq ratio, small-cap breakouts, and a Fed that's still cutting despite internal division—this looks more like rotation than breakdown.

But stay vigilant. Watch those bond market ratios for signs of liquidity stress. Monitor whether tech can stabilize and participate in the next leg higher. And pay attention to whether Bitcoin can reclaim that $94,000-$95,000 resistance zone, because crypto often leads risk appetite shifts across all markets.

The setup for early 2026 looks compelling, but only if these catalysts continue moving in the right direction. Markets don't move in straight lines, and neither do rotations. The opportunity is real—just make sure you're watching the right indicators to know when the story is changing.

Back to News

Epic Market Rotation or Dangerous Crack? What Last Week's Split Tape Means for Investors

MarketDash Editorial Team
9 hours ago
The Dow climbed while tech tumbled last week, signaling a potential rotation into small caps and value sectors. We break down three stocks positioned to benefit from this shift—plus key market catalysts to watch as we head into 2026.

Last Week's Market Split: A Tale of Two Tapes

Last week gave us one of those market sessions that makes you wonder if different indices are watching entirely different economies. The Dow Jones finished up 1.05%, looking perfectly content with itself. The S&P 500 actually hit a new high during the week but couldn't hold it, closing down 0.63% by Friday. And then there's the Nasdaq, which took it on the chin with a 1.62% decline as tech stocks got hammered.

But here's where it gets interesting. While the big tech names were bleeding, small caps were having a party. The Russell 2000 hit new all-time highs, and not just barely—it broke out convincingly. This index has substantial exposure to financials, healthcare, and industrials, which are suddenly looking a lot more attractive than they did a few months ago. Meanwhile, crypto had a rough week, though silver managed to hit another all-time high. And despite the Fed cutting rates, risk assets didn't exactly soar into the stratosphere.

So what's happening here? Is this a dangerous crack in the bull market, or are we watching an epic rotation that could define 2026? Let's dig into three stocks that could benefit from this shift, and then look at the market catalysts that'll matter most in the weeks ahead.

Three Stocks Positioned for the Rotation

Invesco: Riding the Asset Management Wave

Invesco Ltd. (IVZ) is a global investment management firm that offers everything from ETFs and mutual funds to alternative investments across equities, fixed income, and multi-asset strategies. Think of them as the infrastructure provider for the wealth management boom that's been building for years.

The Current Situation

The company just posted quarterly revenue of $1.19 billion and earnings of $275.4 million. The valuation looks solid here: P/E sits at 17.56, Price-to-Sales is 1.87, and EV to EBITDA comes in at 9.61. From a technical perspective, IVZ recently broke out from an ascending triangle formation, which typically signals continuation of the underlying bullish trend.

Why This Matters Now

Invesco is capitalizing on the asset management industry's resurgence in a big way. The company delivered record Q3 2025 net long-term inflows of $28.9 billion, driven by strength across ETFs & Index, their China joint venture and India operations, Fundamental Fixed Income, and Private Markets. That's not just good—it's exceptional organic growth in an environment where global markets are rising and investor confidence is returning.

The assets under management story is even more compelling. Ending AUM surged to $2.125 trillion, representing a 6.2% quarter-over-quarter increase. This scale matters enormously because fee-based models thrive in this environment, creating a powerful revenue flywheel as more assets flow in.

Invesco's strategic focus on high-growth regions diversifies their revenue beyond traditional Western markets. The China joint venture and India operations provide emerging market exposure right as those economies are attracting more global capital. Meanwhile, their booming ETF and private markets segments tap into the secular shift toward passive strategies and alternatives—exactly where investor preferences are heading.

For income-focused investors, Invesco declared a quarterly dividend of $0.21 per share, up 2.4% from prior levels. That translates to a sustainable 3.49% yield, with management targeting normalized payout ratios around 40%. This balance between growth investments and consistent capital returns makes the story even more attractive.

The analyst community is neutral here, with Goldman Sachs rating it Neutral, RBC Capital at Sector Perform, and Barclays at Equal-Weight. Sometimes neutral ratings are exactly what you want—they suggest the street hasn't fully caught on yet.

The Trade Setup (61% Return Potential)

I'm bullish on IVZ above the $22.00-$23.00 range. My upside target sits at $42.00-$43.00, representing roughly 61% potential return from current levels.

Oceaneering International: Offshore Energy's Hidden Gem

Oceaneering International, Inc. (OII) provides engineered services and products for the offshore energy industry. They specialize in remotely operated vehicles, subsea robotics, asset integrity management, and advanced technologies for both traditional oil and gas operations and renewable energy applications.

The Current Situation

Last quarter showed $742.9 million in revenue and $44.76 million in earnings. The valuation is compelling: P/E of just 11.81, Price-to-Sales at 0.97, and EV to EBITDA at 7.08. Technically, OII recently broke out from a saucer formation, and these patterns typically lead to accelerating upside momentum.

Why This Matters Now

Oceaneering is riding sustained offshore energy demand beautifully. Q3 2025 showed revenue climbing 9% to $743 million, while net income surged 73% to $71.3 million. This performance came from strong asset utilization and operational efficiencies in a stabilizing oil market with rising deepwater exploration activity.

The backlog story provides excellent revenue visibility going forward. Oceaneering recently won a multi-year contract from bp Mauritania for inspection, maintenance, and repair services in the Greater Tortue Ahmeyim field. They also secured a vessel services agreement for the MPSV Harvey Deep Sea running through 2027. These aren't one-off projects—they're steady streams of high-margin work in both emerging and established basins.

Innovation gives Oceaneering a competitive edge that's hard to replicate. The company launched Vision™ Subsea, a cloud-based module for 3D data visualization and remote integrity assessments. This extends their digital solutions into underwater environments, letting operators optimize asset management with engineering-grade insights while reducing operational risks. In a sector increasingly focused on efficiency and sustainability, this matters tremendously.

The diversified segment strength provides resilience beyond just oil prices. With contributions from subsea robotics, offshore projects, and manufactured products, plus expansion into aerospace, defense, and renewables, Oceaneering has built a portfolio that can weather volatility in any single market.

Analyst sentiment here includes TD Cowen at Hold, Barclays at Equal-Weight, and Citigroup at Neutral. Again, we're seeing a street that hasn't fully embraced the story yet.

The Trade Setup (34% Return Potential)

I'm bullish on OII above the $23.00-$24.00 zone. My upside target is $35.00-$36.00, offering approximately 34% return potential.

Xometry: Revolutionizing Custom Manufacturing

Xometry, Inc. (XMTR) operates an AI-powered online manufacturing marketplace that connects buyers with a global network of suppliers for custom parts and assemblies. They offer instant pricing and lead times for services like CNC machining, 3D printing, and injection molding.

The Current Situation

Last quarter delivered revenue of $180.72 million and earnings of $6.21 million. The valuation is admittedly steep, with Price-to-Sales at 4.56 and Book Value at just 5.31. But growth stories often command premium valuations. Technically, XMTR just broke higher from a symmetrical triangle formation, which usually signals trend continuation to the upside.

Why This Matters Now

Xometry is tackling a massive opportunity: the fragmented $275 billion custom manufacturing market. Their AI-powered marketplace connects buyers and suppliers for instant quoting and seamless sourcing across industries like aerospace, automotive, and medical devices. This digital transformation narrative is accelerating as companies demand more resilient supply chains and ESG transparency.

The revenue acceleration is genuinely explosive. Q3 2025 revenues surged 28% year-over-year to a record $181 million, with marketplace growth hitting 31%—outpacing prior quarters and beating internal guidance. This performance came despite a challenging manufacturing macro environment, which makes it even more impressive. The network effects are kicking in, creating recurring business that should sustain double-digit expansion well into 2026.

The path to profitability showcases a maturing business model. Xometry achieved record marketplace gross margins of 35.7% and adjusted EBITDA of $6.1 million in Q3 2025, representing a $6.8 million improvement from last year. Management raised full-year guidance to $676-678 million in revenue and $16-17 million in EBITDA, demonstrating scalable economics and cost discipline. This is the transformation from high-growth disruptor to reliable earnings generator.

Product innovation is deepening Xometry's competitive moat rapidly. Recent launches include the Workcenter mobile app for suppliers, U.S. auto-quoting for injection molding, and AI-powered design tools that slash quoting times from days to minutes. These enhancements boost conversion rates and extend the platform's reach into high-volume production, making it increasingly indispensable for global manufacturers navigating digital supply chain shifts.

The Street is split here: JP Morgan rates it Overweight, while both Goldman Sachs and Cantor Fitzgerald sit at Neutral. The divergence suggests there's still debate about valuation versus growth trajectory.

The Trade Setup (89% Return Potential)

I'm bullish on XMTR above the $48.00-$50.00 range. My upside target is $110.00-$112.00, offering roughly 89% return potential for those willing to stomach the volatility that comes with high-growth names.

Market Catalysts That Matter This Week

The Fed's Internal Division Problem

The Federal Reserve wrapped up its final meeting of the year by cutting the target range for the federal funds rate by 25 basis points to 3.50%-3.75%. This marked the third consecutive rate cut, justified by a weakening labor market and inflation that remains slightly elevated but moving in the right direction.

The official statement noted that economic activity continues expanding at a solid pace, with job gains staying strong even as unemployment edges up to a projected 4.5% for 2025. Inflation should moderate gradually toward the 2% target. But here's the hawkish twist: the median participant now forecasts only one additional rate cut in 2026.

The bigger story is the division within the Fed itself. Three members dissented—one wanted a 50-basis-point cut, while two preferred no change at all. That's a pretty wide range of opinion for a committee that usually likes to project unity. Fed Chair Jerome Powell emphasized a data-dependent approach, signaling potential pauses in easing based on incoming labor and inflation data. He also announced plans to purchase shorter-term Treasury securities to maintain ample reserve levels.

This matters because a divided Fed is a Fed that might struggle to respond quickly to changing conditions. Keep a close watch on bond market ratios and liquidity indicators in the weeks ahead.

Small Caps Are Having Their Moment

While large cap indices spun their wheels last week, the small-cap Russell 2000 broke out to a new all-time high. This isn't just a one-day pop—it looks like 2026 could shape up to be a year where small caps finally outperform after years of lagging their large-cap cousins.

The tailwinds make sense. Lower interest rates from recent Federal Reserve cuts ease refinancing burdens on these companies, which often carry floating-rate debt that makes them especially rate-sensitive. There's also a surge in mergers and acquisitions activity, particularly in biotech, combined with a rebounding IPO market. This should unlock undervalued assets and attract fresh capital inflows.

Broader economic trends favor small caps too. Domestic reshoring benefits U.S.-focused companies disproportionately, and a "soft landing" economic scenario that avoids recession plays perfectly into the small-cap playbook. The biggest sectors in the Russell 2000 include financials, industrials, and healthcare—exactly the themes that look poised to accelerate in 2026.

Reading the Sector Tea Leaves

Since we're on the final stretch of the year, let's tighten up the timeframe for measuring sector performance. The market's been volatile since October, and the current rankings tell a clear story about where money is flowing.

The top-performing sector since the start of Q4 has been healthcare. In second place, we see financials, which have climbed nicely as the yield curve has been steepening. A steeper yield curve means banks can borrow short and lend long more profitably—basic banking 101.

Tech's position in the middle of the pack since Q4 began is slightly concerning, but it's not time to panic yet. What's more encouraging for bulls is seeing utilities and consumer staples hovering near the bottom. When defensive sectors lag, it usually means investors are comfortable taking risk.

Looking at different timeframes, we see some interesting patterns emerging. Over one week, materials have shown strength. Over three weeks, consumer discretionary is coming on strong. Over 13 weeks (basically since Q4 started), healthcare leads. And over 26 weeks, technology still holds the crown.

The recent strength in materials and consumer discretionary sends a mixed signal. Materials strength could indicate commodity inflation expectations, while consumer discretionary strength suggests confidence in consumer spending. Both can't necessarily be true at the same time without creating tension somewhere in the market.

The AI Trade Is Still Alive

The ratio between semiconductors and the Nasdaq 100 is one of the most important metrics for measuring the health of the AI theme. This matters because chips are the foundation of the entire AI revolution—none of it would be possible without ever-increasing computing power.

But here's the real insight: chips tend to lead even more than the broader tech sector. They outperform to the upside when tech is healthy, and they outperform to the downside when tech is struggling. It's a leading indicator wrapped inside a sector.

Fortunately for bulls, this ratio recently experienced a clean breakout from a wedge pattern and successfully retested former resistance that's now turned into support. As long as this ratio continues climbing, the bull market has room to run. The recent retest and bounce suggest the AI trade is far from over, despite the narrative that it might be getting tired.

DeFi's Moment May Be Coming

Cryptos have taken a beating over the past couple of months, but underneath the surface carnage, there appears to be a massive realignment taking place. Look at the ratio between Ethereum and Bitcoin.

Since April, Ethereum has been outperforming Bitcoin by a wide margin. Yes, there was a pullback in the ratio from August into November's low, but that completed a higher-low, which arguably reestablishes a new uptrend.

We're now looking at a rounding bottom formation in this chart. If this breaks above the upper horizontal trendline of the pattern, it would confirm that Ethereum is set to outperform Bitcoin substantially going forward. This matters because Ethereum represents the decentralized finance ecosystem, while Bitcoin is increasingly viewed as digital gold. If DeFi is coming back into favor, it suggests risk appetite in crypto is improving beyond just the "safe" play.

Bond Market Liquidity Is the Key

The Fed cut rates last week, but the most important thing to watch now isn't the rate cut itself—it's how bond markets respond. Long-term rates look like they want to keep climbing for another month or so, but I'm more focused on liquidity conditions.

Consider the ratio between junk debt and 3-7 Year Treasuries. We want to see junk bonds outperforming Treasuries to signal healthy liquidity and risk appetite. The more this ratio climbs, the better liquidity conditions become.

Right now, this ratio is consolidating near resistance of a saucer formation. If we see a breakout here, which I'm expecting, watch for a significant breakout in stocks to new all-time highs. The two tend to move together because they're both measuring the same thing: whether investors are comfortable taking credit risk.

While liquidity conditions look poised for massive improvement in the near term, we need to monitor whether inflationary pressures creep back into the market. If inflation resurges, this ratio should start to drop as investors flee risk. In that scenario, expect the Fed to become much more aggressive with rate cuts. But for now, they're trying to narrow spreads with minimal intervention—which is exactly what you want to see in a healthy market.

What's Happening in Crypto

Bitcoin rallied to take out the previous week's high before facing selling pressure after the Fed cut rates. In theory, more liquidity should be a tailwind for crypto, but there are serious technical headwinds to overcome.

First and foremost, the trend is now to the downside. Bitcoin keeps making lower lows and lower highs, and until we see this reverse, bulls will struggle to reestablish momentum. At this point, the best bet is watching for a higher low on this pullback.

Another concern is that the recent rally could be interpreted as a corrective move within a rising channel—not a reversal. However, there's a resistance zone in the $94,000-$95,000 area that, if cleared, should lead to a rally up to the $105,000 zone. This is the key level to watch in the near term. A break above that resistance would suggest the correction is over and the uptrend is resuming.

The Bottom Line

Last week's market action wasn't random noise—it was the beginning of what could be a significant rotation from mega-cap tech into small caps and value sectors. The Russell 2000's breakout to new highs, combined with strength in financials and healthcare, suggests this shift has legs.

The three stocks highlighted here—Invesco, Oceaneering International, and Xometry—are positioned to benefit from different aspects of this rotation. Invesco plays the asset management boom and small-cap resurgence. Oceaneering captures offshore energy's revival with attractive valuation. And Xometry is revolutionizing a massive manufacturing market with impressive growth metrics.

The key question is whether this rotation represents a dangerous crack in the bull market or an epic shift that defines 2026. Based on the evidence—improving credit spreads, a healthy semiconductor-to-Nasdaq ratio, small-cap breakouts, and a Fed that's still cutting despite internal division—this looks more like rotation than breakdown.

But stay vigilant. Watch those bond market ratios for signs of liquidity stress. Monitor whether tech can stabilize and participate in the next leg higher. And pay attention to whether Bitcoin can reclaim that $94,000-$95,000 resistance zone, because crypto often leads risk appetite shifts across all markets.

The setup for early 2026 looks compelling, but only if these catalysts continue moving in the right direction. Markets don't move in straight lines, and neither do rotations. The opportunity is real—just make sure you're watching the right indicators to know when the story is changing.

    Epic Market Rotation or Dangerous Crack? What Last Week's Split Tape Means for Investors - MarketDash News