Wait, the 600 is leading the 500 by 600 Basis Points!?
- cornerstoneams
- Jan 21
- 5 min read
In our previous edition we shared how collective stock market participants were improving the structural health of the market by broadening out its participation.
This process began after the quick but short-lived drop in the stock market back in mid-November. Since then, the broadening trade has been in place and increased its momentum in early 2026.
Part of this broadening storyline has been small size companies (a.k.a. small caps) as they have been putting in actual outperformance since this shift in November. To offer small companies are actually outperforming seems to lean toward telling falsehoods.
It has been a long while since small companies have been able to claim a spot atop the leaderboard within the stock market structure. So long in fact that trust in this shift has us questioning its validity and its stamina to maintain itself.
We remind ourselves, upon sharing such a view, that this type of sentiment sounds like perfect bottoming psychology. To be clear, it is not that small companies have been in a long downtrend; rather, they have been in a long period of marginal participation all while the narrow stock market went about trending higher and higher.
Let’s get perspective via small company trading behavior in recent years just below.
The above is the S&P 600 small company index dating back to early 2019. Our blue arrow notes the expected behavior of the S&P 600 as the stock market quickly ascended off its Covid lows.
Historically speaking, small companies lead the way in performance, in particular when shooting off prior notable downturns such as is displayed above at the beginning of our blue arrow. From that low point, the S&P 600 small company index handily outperformed both the weighted and the equal-weight versions of the S&P 500 by the end of 2020.
While the S&P 600 increased by 63% from the highlighted low point to the end of 2020, the equal weight S&P 500 increased by 53%, while the weighted S&P 500 increased by 45%. These types of results point to traditional strong and robust bull market activity coming off of notable lows.
That is, fresh bull runs are historically strong in broad participation, a characteristic that has been sorely missing in the stock market landscape coming out of the 2022 lows.
In early 2021, the S&P 600 small company outperformance characteristic began to significantly change and has been in place since that time.
Our red horizontal line begins at the high-water point for the above index in early 2021. Note the lack of any meaningful trend for the follow-on years. There would be fits and starts, only to end up trendless.
To the far right of the chart, where our red line ends, is where our most recent trend attempt began. This is also where the S&P 600 small company index began to assert performance leadership.
Below we isolate 2026 and the outperformance of the S&P 600 small company index.
The above is a baseline chart with the S&P 500 (weighted version) acting as the baseline while the S&P 600 index reflects its performance relative to the S&P 500 baseline.
The outperformance of the S&P 600 has been positive from the very beginning of 2026 and has built on its momentum as the month of January has pressed on.
As of this writing the small company index is outperforming by 610 basis points, or 6.10%. This certainly is leadership behavior and importantly, behavior that began coming out of the quick dip in November. With this, the S&P 600’s leading behavior has been unfolding for a couple of months.
In light of the small caps’ poor performance over the last several years, to see a couple of months’ run of outperformance is noteworthy.
Will it last?
As depicted in our first chart above, this is not the first time we’ve seen small company’s begin to perform to a level of suggesting something substantive was unfolding, to only then see the trend attempt fade away as fast as it started.
Here is our central cautionary observation/contemplation:
In light various well-known big tech companies struggling with their trends, which in some cases have turned into notable percentage reductions from their high water marks, can the stock market overall hold together in light of this tremendous leadership space (of recent years) struggling with their stock price performances since November.
This space has primarily been responsible for the weighted S&P 500’s outsized performance since 2022.
The narrow stock market performance since 2022 has been masked over, if you will, by the tremendous outperformance of the weighted S&P 500, which itself has been driven in large part by the aforementioned big tech companies who are now, generally speaking, struggling with their trends.
Similar to the S&P 600’s upside momentum build since November, market participants have been attempting to build downside momentum among the big tech leadership space since November.
Also similar to the S&P 600’s momentum build here in 2026, said big tech downside momentum build is broadening out to more tech names as we have traded through a decent chunk of this first month of 2026.
This developing storyline has us both intrigued and cautious on capital deployment.
While the weighted S&P 500 has been struggling in its performance since November, a topic we shared in more detail in our previous edition, as of this writing it is now negative for the early part of 2026. It was positive just a couple of sessions previous.
The big tech downside is trying to build in its momentum and while doing so it is taking the weighted S&P 500 with it. This is expected in light of the strong weightings to this space within the weighted version of the S&P 500.
Circling back to the central point of this edition, which is small company outperformance, to emphasize, we are focused on whether this space, along with the broader stock market, can hold itself together if we see prior leadership (big tech) move notably lower from here.
When notable prior leadership turns over, history offers downside concerns for the stock market at large are valid. Will that be the case this time? First, we need to see if big tech will build downside momentum from here or whether this is just a short bout of stock price adjustments.
If big tech does build downside from here, the central observation point will be whether the broader market can continue to perform such as it has since mid-November?
As stated, this is our central cautionary observation/contemplation which as us intrigued with potential opportunity, and yet, cautious in light of questionable behavior from long-standing leadership, i.e. big tech.
We will share as this storyline unfolds.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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