Investors are looking past headline inflation noise to drive a significant market shift. According to Professor Jeremy Siegel, the current rotation toward small-cap and value stocks is sustainable, supported by underlying economic resilience and the clear trajectory of Federal Reserve policy.
Broadening Market
Professor Siegel observes a notable rotation away from the largest growth names as earnings season begins, suggesting a healthier market advance is underway.
Large-cap growth stocks have recently pulled back roughly 10% to 12% relative to value. Unlike previous reversals driven by fleeting volatility, Siegel asserts that “this one appears more durable”.
Small-cap stocks, in particular, now have real momentum behind them. He argues that small-caps do not require “heroic earnings growth” to perform well from current levels; if earnings merely stabilize while the Fed pivots, the case for broader market leadership remains strong.
Resilience Overcomes Inflation ‘Noise’
While recent CPI and PPI reports contained some “headline inflation noise,” Siegel maintains the data is consistent with gradual disinflation rather than reacceleration.
He highlights that official shelter costs are lagging real-time data, noting that WisdomTree's measure of Core inflation is only 1.6% when substituting in current rents, compared to the official 2.6%.
On the growth front, the economy remains “impressively resilient”. While fourth-quarter GDP estimates may be distorted by trade flows, Siegel sees no evidence of an imminent downturn. The labor market reinforces this view, with jobless claims signaling “no meaningful deterioration.”
Fed's Clear Trajectory
With the Federal Reserve entering its pre-meeting quiet period, Siegel views the lack of a January rate hike as a “settled question.”
He identifies March as the earliest plausible window for a cut. Regardless of the precise timing, Siegel believes the direction of policy is clear for the coming year, creating an environment where “diversification finally pays off.”
The CME Group's FedWatch tool‘s projections show markets pricing a 95% likelihood of the Federal Reserve leaving the current interest rates unchanged in January.
Tech Stocks Lag In 2026 So Far
So far in 2026, the Nasdaq 100 index has declined by 0.87%, whereas the S&P 500 index has been down 2.06%. However, the Dow Jones index was up by 0.22% on a year-to-date basis.
Meanwhile, the ETF tracking the small-cap index Russell 2000, iShares Russell 2000 ETF (NYSE:IWM), was up 5.55% YTD.
The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 index and Nasdaq 100 index, respectively, closed lower on Tuesday. The SPY was down 2.04% at $677.58, while the QQQ declined 2.12% to $608.06.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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