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Executive Summary

• Cyclical leadership reasserted itself as energy, financials, industrials, and small-caps outperformed, supported by improving breadth, firm commodity prices, and a resilient economic backdrop.
• The AI and semiconductor trade remained a dominant driver, with strong memory demand and shifting power dynamics offset by short-term technical and profit-taking pressures for the mega-caps.
• Economic data painted a “slow but stable” picture, with manufacturing still contracting, services accelerating, productivity surging, and labor markets softening without breaking—keeping the Fed patient rather than restrictive.
• Chart of the Week – Elliott Wave and Chart Pattern point higher for the S&P 500.

Cyclical Rotation and a Broader Leadership Profile

The first full trading week of 2026 opened with a notable shift in market leadership. After several weeks of narrow gains driven by mega-cap growth stocks, investors rotated decisively toward cyclical sectors. Energy, financials, consumer discretionary, materials, and industrials repeatedly led the tape, while small- and mid-cap stocks outperformed their large-cap peers.

Energy stocks were the early catalyst. News surrounding the arrest of Venezuelan President Nicolás Maduro and subsequent developments regarding U.S.–Venezuela oil relations injected volatility—and opportunity—into the sector. Oilfield services companies such as Halliburton and SLB surged on speculation that U.S. firms could play a role in rebuilding Venezuela’s production infrastructure. Refiners like Valero benefited from their ability to process Venezuela’s sulfur-heavy crude, while Chevron’s position as the lone major U.S. producer in the country kept it squarely in focus throughout the week.

While energy stocks pulled back midweek as crude prices dipped and Venezuela signaled near-term export plans, the sector rebounded sharply Thursday and Friday as oil prices recovered and macro data reinforced demand stability.

Financials also played a prominent role early in the week, with large banks advancing before some profit-taking ahead of earnings season. Meanwhile, consumer discretionary stocks benefited from strong housing-related data and renewed momentum in homebuilders, supported further by policy actions directing Fannie Mae and Freddie Mac to expand mortgage bond purchases.

Importantly, market breadth improved meaningfully. Advancers consistently outpaced decliners, equal-weight indices lagged market-cap-weighted benchmarks midweek, and leadership broadened beyond technology—all complimented with a return to normal volume trading post the holiday season—often a necessary condition for durable bull-market extensions.

Investment Implications

The rotation toward cyclicals and smaller-cap stocks supports maintaining diversified equity exposure rather than over-concentration in mega-cap growth. Energy, industrials, and select financials may continue to benefit from geopolitical shifts, fiscal policy, and improving domestic demand. For portfolios, this argues for balance—using cyclical exposure as a complement rather than a replacement for long-term growth holdings.

AI, Semiconductors, and the Memory Cycle: Powerful Trend, Short-Term Volatility

Artificial intelligence remained the market’s dominant structural theme, but this week highlighted how leadership within the trade is evolving. Semiconductor stocks powered gains early in the week, driven largely by strength in memory and storage names rather than the largest AI platform companies.

Microchip’s upward revision to fiscal guidance signaled continued strength for memory suppliers. Sandisk, Western Digital, Seagate, and Micron all posted outsized gains as demand for enterprise storage and AI-related infrastructure accelerated. Reports late in the week that Sandisk plans to raise enterprise SSD pricing reinforced AI-driven demand is improving industry profitability.

At the same time, NVIDIA—still the bellwether for AI enthusiasm—struggled to break decisively higher despite announcing its new Rubin platform and expanding further into autonomous driving through open-source initiatives and partnerships at the Consumer Electronics Show in Vegas. While these developments are strategically significant, the stock’s consolidation near its 50-day moving average limited upside and contributed to short-term choppiness across the broader technology sector.

The competitive implications also rippled outward. Tesla sold off sharply after NVIDIA’s autonomous-driving announcements, while rideshare companies like Uber rallied on expectations that faster progress toward driverless fleets could reshape transportation economics.

By midweek, profit-taking set in. The PHLX Semiconductor Index pulled back after a strong start to the year, and technology underperformed even as the broader market held near record highs. This divergence reinforced the notion that AI leadership is no longer monolithic and that investors are becoming more selective.

Friday, OKLO shares surged after announcing a major partnership with Meta Platforms (META) to build a 1.2 GW nuclear power campus in Ohio to supply clean, always-on electricity for Meta’s expanding data centers and AI infrastructure. Oklo will deploy multiple Aurora small modular reactors on a former Department of Energy site, with Meta providing upfront funding and power prepayments to improve project certainty. Construction work is expected to begin in 2026, with initial power online around 2030 and full capacity reached by 2034.

The deal is financially transformative for Oklo, allowing it to retain ownership of the assets while securing long-term, high-margin revenue through 20-year power purchase agreements and reducing early-stage development risk. Strategically, the agreement reinforces the “nuclear renaissance” theme, signaling that Big Tech is committing real capital to next-generation nuclear solutions to meet AI-driven power demand.

The agreement lifted tech’s performance to finish the week strong, second only to materials on Friday.

Investment Implications

The AI investment thesis remains intact, but returns are likely to be more uneven. Memory, infrastructure, and enabling technologies seem to be the current investor focus rather than the most crowded mega-cap trades. From a portfolio standpoint, this favors a barbell approach—maintaining core exposure to AI leaders while selectively adding positions in underappreciated beneficiaries of the buildout cycle.

Economic Data, Labor Markets, and the Fed’s Delicate Balancing Act

This week’s economic data reinforced a familiar but constructive narrative: the U.S. economy is slowing, not stalling. Manufacturing remains in contraction, with the ISM Manufacturing Index below 50 for a tenth straight month, pressured by tariffs and weak orders. However, services activity accelerated meaningfully, with the ISM Non-Manufacturing Index reaching its strongest level of 2025 and employment within the sector returning to expansion.

Labor market data continue to point to a controlled cooling rather than outright deterioration. December payroll growth was modest, yet the unemployment rate declined to 4.4%, initial jobless claims remain historically low, and wage growth has stayed contained. At the same time, productivity surged while unit labor costs fell—one of the most constructive combinations for expanding corporate margins. This dynamic underpins my central theme for 2026: improving profitability driven by productivity gains and a softer labor market influenced by AI adoption. That said, while labor-driven inflation pressures appear muted, I do not believe inflation will be fully contained this year, particularly as commodity prices continue to trend higher and introduce renewed cost pressures into the system.

Housing data delivered another bright spot. While headline housing starts were soft, single-family starts rose sharply and reached their highest level since July. Combined with policy support for the mortgage market, homebuilders rallied aggressively and became a key driver of consumer discretionary strength.

For the Federal Reserve, the takeaway is mixed but manageable. The data effectively removed the likelihood of a near-term rate cut and did little to suggest the need for any tightening—which Powell last said isn’t remotely being discussed. Markets appear comfortable with the “pause”, particularly as productivity gains offset labor cost pressures.

Investment Implications

A slow-growth, low-recession-risk environment favors equities over bonds, particularly sectors tied to domestic demand and productivity gains. While rate-sensitive assets may remain volatile, the broader macro backdrop supports staying invested rather than defensive. Fixed income continues to play a stabilizing role, but equity allocations remain the primary driver of return potential.

Chart of the Week

Recent technical analysis continues to suggest upside potential for the S&P 500 in the near term. The consolidation phase that followed the September peak and carried through the November lows appears to have resolved, with price action now signaling the start of a new advance.

From a pattern perspective, the chart is developing what technicians refer to as a head-and-shoulders continuation formation. If confirmed, this structure projects a potential upside target near 7,262. A key level to monitor is 6,900, the neckline, which must hold to maintain this constructive outlook—and so far, the index has respected that support.

Source: StockCharts, Ryan Puplava, CMT® CTS™ CES™

Elliott Wave analysis reinforces this bullish interpretation. This framework is designed to identify the rhythm and direction of market trends, with five-wave advances typically unfolding in the primary trend direction. Current wave structure suggests a new five-wave advance is emerging from the November lows, consistent with a broader upward trend. In addition, a short-term wedge pattern that has constrained prices over the past month appears to be resolving, further supporting the case for higher prices in the weeks ahead.

Using Fibonacci price extensions—a common tool within Elliott Wave analysis—we can estimate potential upside objectives based on the magnitude of prior rallies. Applying these extensions to the November–December advance produces a baseline target near 7,251 if the move simply matches the prior rally. More aggressive extensions point to upside levels around 7,341, 7,456, and potentially as high as 7,583 in the event of a stronger acceleration.

Source: StockCharts, Ryan Puplava, CMT® CTS™ CES™

Together, these tools provide a practical roadmap for estimating where the market could go next. Chart patterns, wave structure, and Fibonacci projections are not about precision forecasting, but about identifying areas where momentum often carries prices. When multiple methods point in the same direction—as they do now—it increases confidence that the S&P 500’s near-term trend remains biased to the upside.

Bottom Line

The first full week of 2026 delivered an encouraging signal: markets are advancing with broader participation, resilient fundamentals, and improving internal health. While volatility within leadership themes is likely to persist, the combination of cyclical strength, AI-driven productivity, and a stable macro backdrop keeps the longer-term outlook constructive as earnings season approaches.

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