Hi, everyone. I'm Liz Ann Sonders, and this is the January Market Snapshot. In this installment, I'll provide a review of markets in 2025 and discuss some of the most important themes as we get settled in 2026.
[Table for "International pulls ahead in 2025" for Market performance is displayed]
So looking back over the past year, one of the most notable shifts in global equity markets has been the resurgence of international stocks. After several years of persistent underperformance versus U.S. equities, both the developed international stocks (as measured by the MSCI EAFE Index) and emerging markets equities decisively outpaced the S&P 500 and NASDAQ in 2025.
[Yellow-highlighted boxes for 1m and 12m return columns are displayed]
And it's not just last year that international outperformed. That trend has continued over the trailing one-month period as well. In fact, although I don't have it highlighted, the two-year return column also shows the healthy returns for non-U.S. stocks. This relative strength has helped close part of the performance gap that had widened significantly during the post pandemic mega-cap-driven rally in the United States market.
Now, small caps have also taken on a leadership role, especially small cap growth stocks. The overarching lesson of all of this is not that U.S. large-cap leadership has vanished, but rather that leadership has become more cyclical, more diverse, and less one-directional than it was during the height of the mega-cap surge.
[High/low chart for "An equal chance " for S&P 500 Equal Weighted Index and S&P 500 Equal Weighted Index/S&P 500 Index relative performance ratio is displayed]
Now, zooming in on more recent trends reveals another important development: a healthier internal rotation within the US equity market itself. In the latter part of 2025, performance leadership started to shift away from a narrow set of very large companies toward the so-called average stock. The equal-weighted S&P 500 has recently been outperforming its cap-weighted counterpart, indicating that gains are no longer just being driven exclusively by the largest constituents. And the same dynamic has played out in small-cap land where the equal-weighted Russell 2000 has surpassed the traditional cap-weighted index.
This matters because equal-weighted indexes are often viewed as a barometer of market breadth. When equal-weight outperforms cap-weight, it suggests that returns are being shared more evenly across companies, rather than concentrated in a handful of giants. Now, while the equal-weighted S&P 500 still has ground to make up relative to the cap-weighted version of the index, which is the common index, over longer time horizons focusing solely on relative performance, shown in the bottom chart here, can obscure an equally important signal. Look at the absolute climb in the equal-weighted index itself, and that's in the top chart. Its steady advance through 2025 confirms that participation has broadened, lending greater durability to the market's advance.
[Table for "Magnificent" for Magnificent 7 performance, performance rank and contribution rank is displayed]
Now, the renewed attention on equal weight performance inevitably brings up the role of the mega-cap stocks into sharper focus. The past year was a textbook illustration of the difference between a stock's contribution to index returns and its actual price performance. So contribution rank is driven by the combination of price performance and market
capitalization, whereas performance rank is just driven by price appreciation or depreciation alone. Now, in years when market leadership has been extremely concentrated, the two have often diverged meaningfully.
[Yellow-highlighted boxes for NVIDIA 2025 performance rank and contribution rank are displayed]
Take Nvidia as a case in point. In 2025, it was the single largest contributor to the S&P 500's overall returns, but that owed to its enormous index weight. If you ranked Nvidia by price performance among the S&P 500's constituents, it placed only 75th. Now, although I don't have it highlighted specifically, take a look at Apple. That provides an even starker example. Despite ranking eighth in terms of contribution to index returns, its performance rank sat far lower, at 229th.
[Green-highlighted boxes for Amazon YTD performance rank and contribution rank are displayed]
Now, this divergent story has persisted so far in 2026. Another case in point in terms of this year would be Amazon, which has become the number one contributor to the S&P 500's returns. However, there are more than 120 stocks in the index with better price performance. These discrepancies underscore how a handful of very large companies can dominate headline index returns by virtue of the multiplier of their cap sizes, even when a substantial number of stocks are actually performing just as well or better on a price performance basis.
[High/low chart for "Cyclicals' dominance suggest economic strength" for GS cyclicals vs defensives ex-commodities is displayed]
Now, another lens through which to view the market's improving breadth is the relationship between cyclical and defensive sectors of the market. Since last April's lows, that was in April of 2025 around the initial tariff announcements, since then, cyclical sectors have surged relative to defensive sectors, pushing that ratio to new highs. Now, cyclicals tend to benefit from improving growth expectations, increased risk appetite, so their renewed dominance does suggest greater confidence in the economic backdrop and in turn the earnings outlook.
[High/low chart for "Defensives fading quickly" for Defensive sectors as % of S&P 500 market cap is displayed]
However, this dynamic is not purely about the strength in cyclicals, it's also about weakness in defensives. Over the past couple of years, traditionally defensive sectors like consumer staples, healthcare, utilities, have delivered notably poor relative performance. As a result, their combined share of the S&P 500's total market capitalization recently fell to an all-time low as you can see. That's a striking statistic, and one with historical echoes.
The last time defensive sectors weight in the index compressed to similar levels as today was in the late 1990s, just before the technology bubble burst. Now, importantly, today's environment differs in many important respects, but the comparison does serve as a reminder of how skewed market leadership can become during periods of enthusiasm for a narrow set of growth themes. The shrinking footprint of defensives reflects not only their own struggles, but what has been until recently, the overwhelming dominance of a few mega-cap stocks clustered in a few sectors.
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Taken together these trends paint a nuanced picture of the current market landscape. International equities are finally regaining some lost ground. Within the U.S., leadership is broadening, with equal-weight indexes and cyclical sectors gaining traction. At the same time, market capitalization does remain heavily concentrated, and the gap between contribution and price performance among the mega-caps highlights the distortions that extreme concentration can create.
Now we always espouse diversification both across and within asset classes, and frankly, there are times when recommending diversification meant having to regularly say we're sorry. More recently, though, recommending diversification has meant we're able to say you're welcome.
And that's it for this month's installment. Thanks, as always, for tuning in, and I'll be back next month.
[Disclosures and Definitions are displayed]