INSIGHTS

On February 09, 2026

AAM Viewpoints — 2026: A Revival of the Underdogs?

January proved to be a month characterized by expansive price swings and only moderate gains among the major indices. An old Wall Street adage states that “As goes January, so goes the year.” If this proves true it may mean that consensus forecasts among market watchers will be correct for 2026. But the stock market has an uncanny way of defying mass sentiment, and I suspect this will be a year when we witness that defiance. Therefore, the market could either finish lower or sport significant double-digit gains this year. Regardless, market forecasts typically pertain to the major stock averages themselves and can have limited bearing on the market’s actual money-making opportunities. While on the surface January may not have been a banner period for the market bulls, I believe there were developing patterns that could make for a rewarding equity environment regardless of the S&P 500’s results. It is my contention this could prove a stock-picking year and more a market of stocks and themes rather than indexing strategies.

One of the most interesting developments in January was the rising relative strength trends in sectors that had been long-standing underdogs. As far back as last October, technology, which had attracted the attention and imagination of investors for years, began to exhibit braking upward momentum, making it something of a laggard. Only two Magnificent Seven stocks beat the S&P 500 last year. It is notable that the NASDAQ is the only index among the three majors that has yet to set an all-time record high in 2026 — its last record feat dates back to October 29, 2025. As technology consolidated, other sectors filled the void and the market retained its bullish foothold. A few examples of potentially emerging leaders included Agriculture, Energy, Health Care and Materials. These are categories which could re-emerge as standouts in 2026 and beyond, potentially performing better than the S&P 500. The rotational action since last October may be meaningful regarding longer-term market trends as more traditional market sectors overshadow the AI (artificial intelligence) theme.

Perhaps an even more bullish development is the action in small and mid-capitalization stocks. The S&P 400 MidCap Index is up more than 5% year-to-date while the S&P 500 Index is little changed. This diverging performance began to take form early in the fourth quarter of 2025 and my forecast calls for the S&P 400 MidCap Index to exceed the S&P 500’s returns in 2026, potentially crossing 4000. The bullish pattern in the S&P 400 MidCap Index may reflect rising investor confidence with a greater willingness to accept more risk for more reward. This would tend to bode well for the bullish camp as investors gravitate to these capitalization tiers that had fallen behind for years and now are technically poised for sustained longer-term advances. This could further bolster the underlying foundation of the market’s uptrend and reinforce my position that the sustainability of the bull market is not solely dependent on any one particular sector or theme.

Year-to-date, The Dow Jones Transportation Average is keenly outperforming its counterpart, the Dow Jones Industrials by more that 900 basis points — another bullish sign for the overall market. Harkening back to a time when the Transports were referred to as the “Rails,” Charles H. Dow introduced a theory (The Dow Theory) that argued it was a bullish sign when transportation stocks led the industrial stocks higher. Presumably, advances in railroads and shippers were early indications of burgeoning economic activity as this denoted increased demand for commodities and goods. In the digital age, the theory has not held as much weight as an indicator but as the market gravitates toward more traditional areas of the economy it may be worth heeding this theory.

I expect investor success in 2026 to be based on strategic allocations in emerging sectors, themes and capitalization tiers. This is not to say that technology cannot be a meaningful participant this year, but it is likely not to be a runaway leader as it has been in the past. Agriculture, Energy, Health Care, Manufacturing and Materials are traditional industries that could garner renewed attention as investors seek overlooked and under-loved market categories.

CRN: 2026-0206-13201 R

The opinions and views of this commentary are those of Peroni Portfolio Advisors and are not necessarily that of Advisors Asset Management.

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