S&P 500 rises 1.4% in January; small-cap stocks outperform

Large-cap indexes posted positive returns in January after a volatile month, but were still outperformed by benchmark US small-cap indexes.

The S&P 500 gained 1.4% month over month in January, bouncing back from a slight monthly loss in December 2025, according to S&P Global Market Intelligence data. The Dow Jones Industrial Average posted a slightly better 1.7% return. The small-cap-focused Russell 2000 index beat both of its large-cap peers with a 5.3% rise.

The CBOE Volatility S&P 500 Index, also known as the market's "fear gauge," climbed to over 20 points on Jan. 20 from under 15 points at the start of the year, Market Intelligence data shows. The increase in market volatility coincided with Greenland-focused geopolitical discussions between the US and the EU. These discussions included the potential for new US tariffs on European countries.

"There are many things to point to that are having an effect on equities, but it would be hard to ignore the Greenland issue and the effect that it had," Isaac Wheeler, head of balance sheet strategy at Derivative Path, said in an interview. "Every time the Trump administration reminds people that the US is willing to use tariffs as a policy tool, it has an effect on markets."

Market volatility initially increased ahead of the World Economic Forum Annual Meeting in Davos, Switzerland, but eased following announcements of diplomatic progress involving Greenland. Additionally, broader geopolitical considerations, including issues related to Venezuela and Iran, played a role in shaping the market environment.

Other factors that may have limited stronger S&P 500 performance in January included a surge in gold prices, which may have diverted some capital away from US equities and toward metals, and a potential wait-and-see approach among investors as they gauge the direction of the current market cycle, Wheeler said.

"People have been trying to predict the top in this cycle in US equities," Wheeler said. "It hasn't happened yet, but it doesn't surprise me that we're taking a little bit of a breather to start the year. The index is still up a little bit more than 1%."

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Small-cap performance

A continued decline in interest rates in 2026 could provide a stronger boost to small companies relative to larger companies.

Market expectations for interest rate cuts in 2026 have been clouded by sticky inflation metrics and mixed labor market signals as the US Federal Reserve continues to navigate a monetary policy easing cycle that began in September 2024.

However, uncertainty may ease in the coming weeks following the Trump administration's Jan. 30 announcement that it had appointed Kevin Warsh as the next Fed chair once current Chair Jerome Powell's term ends in May. This move could provide a clearer view of the central bank's policy path in the coming months.

"All markets want is some signal that there's some certainty about what's going to happen in the next few months," Dean Lyulkin, CEO of small business lender Cardiff, said in an interview. "If expectations for rate cuts start to ramp back up, we could see a widening gap between the Russell 2000 and the S&P 500."

Rate-sensitive companies such as banks and real estate investment trusts will also likely benefit most from lower interest rates. As these sectors represent a greater index weight in the Russell 2000 than they do in the S&P 500, the small-cap index will be more exposed to bullish support from rate cuts, Lyulkin said.

Interest rate cuts, alongside optimistic earnings growth estimates, are expected to drive investor sentiment among US equities in general this year. However, at their discounted valuations compared to large-cap peers, small-cap stocks might attract more allocation this year amid the strong backdrop.

"You've had great earnings in the large cap, but earnings expectations are rising in small caps, and you have more optimism around forward earnings growth for small-cap stocks," Grant Johnsey, head of market solutions for the Americas at Northern Trust Asset Servicing, said in an interview.

The S&P 500 traded at 22.9x its forward earnings estimate at the end of January, compared to a 17.1x multiple for the S&P SmallCap 600 index, according to Market Intelligence data. The indexes had market capitalizations of $59.230 trillion and $1.553 trillion, respectively, as of Jan. 30.

"If you rotated 1% out of large caps, that's a massive amount of money on a relative basis that would be going into small caps," Johnsey said. "Small caps do seem poised on a secular basis to demonstrate strong relative performance to large caps."

Sector results

Eight of the S&P 500's 11 sectors rose during the month. Only healthcare, information technology and financials recorded monthly drops.

The energy sector performed the best by a large margin with a 14.4% gain. All 22 of the sector's stocks posted positive monthly returns for January, led by SLB NV and Baker Hughes Co., which were up over 26% and 23%, respectively.

The financials sector fell 2.6% during January, the steepest decline among sectors, with 41 of its 76 constituents posting a decline. Fidelity National Information Services Inc. and Coinbase Global Inc. led the sector's stock price drops, down nearly 17% and 14%, respectively.

Largest gains, drops

Data storage company Sandisk Corp. was the best-performing S&P 500 stock in January, rising 142.8%. The company reported that revenue in its data center segment for its fiscal quarter ended Jan. 2 climbed 64% from the previous quarter.

AppLovin Corp. was the worst-performing S&P 500 stock in January, falling nearly 30%. The company's stock faced volatility throughout 2025 and into January 2026. The mobile technology stock most recently faced renewed selling pressure at the end of January alongside similar companies after Alphabet Inc. launched its Genie platform, which provides AI tools for users to build mobile and video games.