Wall Street had one of those weeks where the headline indexes didn't tell the whole story. While large-cap stocks mostly spun their wheels, small-cap stocks absolutely ripped. The Russell 2000 didn't just hit fresh record highs—it also managed its longest consecutive outperformance streak versus the S&P 500 since 2008. That's the kind of rotation that gets market watchers excited.
Small Caps Steal the Spotlight as 2026 Gets Underway
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The Economy That Wouldn't Slow Down
What's driving this small-cap surge? Surprisingly strong economic data, for starters.
The Atlanta Fed's GDPNow model is now projecting U.S. economic growth at a stunning 5.3% annualized rate for the final quarter of 2025. That's not just good—that's boom-territory good. Meanwhile, initial jobless claims came in at 198,000 last week, below expectations and marking the second-lowest level in two years. So much for those cooling labor market fears.
Analysts are interpreting this economic reacceleration as rocket fuel for small- and mid-cap earnings, which means profit estimates are getting revised upward. Earnings season also kicked off strongly for Wall Street's banking giants, with Goldman Sachs and Morgan Stanley both delivering trading revenues that blew past expectations.
Political Turbulence Hits Financial Stocks
But not everything was rosy in the financial sector. President Donald Trump's plan to cap credit card interest rates at 10% sent shockwaves through payment processors. Visa Inc. (V) and Mastercard Co. (MA) suffered their worst week since the April 2025 tariff shock, with both stocks falling more than 5%.
The bigger bombshell came from Washington: the Department of Justice launched a criminal investigation into Federal Reserve Chair Jerome Powell. The allegations center on testimony before Congress regarding spending and renovations of Fed buildings. Powell forcefully rejected the probe as a direct attack on the central bank's independence, a stance that resonated with international policymakers and raised deep concerns across financial markets about political interference in monetary policy.
Tariffs and the Manufacturing Revival
On Tuesday, Trump addressed the Detroit Economic Club, defending tariffs as the catalyst behind Michigan's manufacturing resurgence, particularly in the auto sector.
According to Trump, Ford Motor Company (F) has returned to round-the-clock production at its Michigan complex and announced billions in new investment across Midwestern plants. He also highlighted General Motors Co. (GM)'s plans to shift production of the Chevrolet Blazer and Equinox from Mexico back to U.S. soil.
With a Supreme Court ruling on tariff legality looming, Trump described the legal challenge as driven by "foreign-centric" and "China-centric" interests, while suggesting he has alternative paths available if needed.
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