With broad markets running over a bit of a rough patch in the middle of January, it’s easy to catastrophize and get ahead of oneself with what could go wrong. Undoubtedly, with the Greenland situation and tariff talks in the headlines, it seemed like we were going to experience a Liberation Day 2.0 of sorts. Thankfully, things have since de-escalated, and markets are recovering ground lost in Tuesday’s turbulent session.
Either way, it certainly felt like the January turbulence would set the tone for the rest of the year. And while ringing in a new year with immense volatility and a correction is never fun, I do think that it’s the easiest it’s been in this multi-year bull run to be bearish despite the promise of AI and its monetization potential.
In any case, I think it’s too soon in the year to write off 2026. While the new year could certainly take a bearish turn, perhaps mirroring the one from 2022, I wouldn’t hit the panic button just yet, even if gold’s explosive move higher does suggest things could stay choppier going into year’s end.
Geopolitical fears aside, 2026 could be a big moment in the AI revolution
Even as geopolitical fears stay heightened for longer, it’s earnings that are likely to determine the market’s path forward. And right now, the AI boom might be ready to monetize and kick off some sort of supercycle that powers the broad basket of tech titans higher.
Of course, not everyone sees above-trend earnings in this new year, especially for those who see a bumpier path ahead for the AI plays. Deutsche Bank might think that the “honeymoon” is over for the AI stars, but pending a recession (which has proven elusive over the years), I’m not betting on 2026 being a repeat of 2022.
Wedbush Securities star analyst Dan Ives seems to think that tech stocks could gain up to 25% this year. And despite the recent rise in volatility, I do think Ives has a pretty good shot of being proven right for staying bullish on the sector once again. At this juncture, it’s easier to be bearish than bullish, given the pace of AI spending.
There’s a chance that front-loading the capex could lead to tremendous waste. At the same time, some of the most brilliant visionaries in the field seem to think that the spending is needed to unlock the power to be had from this AI revolution. Personally, I think 2026 is a show-me year for the AI titans. If they can show they can effectively monetize, perhaps the AI trade has another big leg higher and another big up year for the S&P 500.
Big tech has dragged, but market strength has broadened
Until several firms can step up to the plate and hit such runs, though, the recent drag on the broad tech sector might keep things a bit flatter for longer. The State Street Technology Sector SPDR ETF (NYSEARCA:XLK | XLK Price Prediction) hasn’t gone anywhere in the past quarter. And while the choppiness could lead to a drawdown from the sector, investors shouldn’t overreact either way.
If your stomach is feeling a bit challenged, perhaps diversifying into a lower-volatility ETF could be a way to smooth the ride out. Sticking with the high-yield small-cap stocks has been a winning move so far this year, with Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD) gaining over 6% so far in 2026. The 6.5%-yielding ETF has been under serious pressure for many years, but the newfound momentum has to be encouraging, especially given the tailwind of lower interest rates.
With Trump likely to pick a new Fed member who’s far more dovish than Jerome Powell, perhaps it’s neglected small caps that could be key to doing well as the heavyweights (think the Mag Seven) run out of steam and the market rally broadens out further.
So, could 2026 be like 2022? Probably not. Though gains could be harder to come by, it does feel like the small caps are set for success as rates look to move lower, rather than higher.
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