Stock Market Turmoil: Tech Stocks Fall Out of Favor, Small Caps and Defensive Stocks "Take Advantage of the Chaos"

U.S. stocks appeared calm on Thursday, but in reality, a fierce capital shift was underway. Last year’s tech darlings are experiencing concentrated sell-offs, with many investors beginning to “escape” and turning towards long-neglected defensive sectors and small-cap companies.

How obvious is this rotation signal? Just look at the Nasdaq 100 Index — it fell 0.6%, ending its consecutive rally, with heavyweight tech stocks like Nvidia and Apple all declining. Even Alphabet, which defied the trend (receiving upgraded ratings from investment banks), couldn’t reverse the overall tech sector’s downturn.

In contrast, other sectors are shining brightly. Trump’s defense spending plan became the strongest catalyst, causing stocks of defense contractors like Lockheed Martin, Northrop Grumman, and Kratos Defense & Security Solutions to soar. The indicator measuring small-cap stock performance surged to a record high — completely “resisting” the monopoly position of the mega-cap tech stocks.

Data best illustrates the point. The Russell 2000 Index (a small-cap barometer) outperformed the Nasdaq 100 by about 4 percentage points in the first five trading days of 2026, marking the second strongest start on record. In other words, forgotten small caps are collectively turning around.

Some analysts admit that it’s still unclear whether this is a “short-term breather” or a “full-scale rotation.” Economic data is indeed optimistic, but the U.S. stock market has been rising for three consecutive years. Investors are currently trying to decide: should they continue betting on tech, or embrace broader investment opportunities?

At the close, the S&P 500 was essentially flat at 6921.46; the Dow Jones Industrial Average rose 0.55% to 49266.11; and the Nasdaq Composite fell 0.44% to 23480.02. Behind these numbers, investors are rethinking the direction of the stock market.