Research Note • Late Dec 2025
Forecast: RTY > SPX > NDX (Next 30 Days)

January Effect rotation: small caps poised to outperform

As of late December 2025, the market is positioned for a "January Effect" rotation where small caps (RTY) are expected to outperform large-cap tech (NDX) and the broader market (SPX).

Driving Factors Analysis

Factor NDX (Nasdaq-100) SPX (S&P 500) RTY (Russell 2000)
Earnings Expectations High bar / rotation risk: Investors are shifting focus from “AI Builders” (chips/infrastructure) to “AI Adopters.” Earnings growth is robust (~14%), but high valuations leave little room for error. Major tech earnings cluster late Jan (27–30). Steady / broadening: Q4 earnings (starting mid-Jan) are expected to show ~11–12% growth. Narrative shifting toward profit broadening beyond the largest names. Acceleration: Small caps enter a “catch-up” phase. Lower rates disproportionately benefit RTY (floating-rate debt exposure), with 2026 growth projected to outpace large caps (~20%+).
Interest Rates (Fed) Neutral/positive: Dec 2025 rate cuts help valuations, but “easy money” is widely priced. Markets watch the Jan 27–28 meeting for dovish confirmation. Positive: Soft-landing + easing rates is supportive. Yields stabilizing near ~4.10% support risk premiums. Very bullish: RTY is the most rate-sensitive index. A cut cycle into 2026 is a primary driver of outperformance via cost-of-capital relief.
AI Factor Saturation/execution: The boom matures; investors demand ROI from AI capex. Disappointment from key players can trigger a sharp pullback. Integration: Productivity gains show up in non-tech sectors (financials, industrials), supporting the broader index. Indirect beneficiary: Less exposed to “AI bubble” risk, but benefits from the economic efficiency AI brings.
Momentum Wobbly highs: Struggling at resistance (~25,850) with signs of exhaustion; momentum fades vs RTY. Trend following: Grinding near highs (6,945+) but facing 7,000 psychological resistance. Breakout: Strongest relative strength; bouncing off support (~2,488) with January tailwind.
Other Factors Concentration risk: Heavy weighting in a few names keeps tail risk high into earnings. Liquidity watch: Potential liquidity drain later in Q1 2026 could lift volatility (more a March risk). Value gap: Discount to large caps (PE ~15x vs ~22x) supports institutional rebalancing flows in January.

30-Day Forecast: Relative Performance (Jan 2026)

Forecast: RTY > SPX > NDX. Expect a rotation trade where capital flows from overextended large-cap tech into small caps and broader cyclical sectors.

1) RTY — Outperformer
  • Outlook: Bullish — January Effect + rate cuts.
  • Targets: Break above 2,550 toward 2,650–2,700.
  • Support: 2,488.
  • Strategy: Buy dips early in the month.
2) SPX — Steady grinder
  • Outlook: Neutral to mildly bullish — broadening sectors.
  • Resistance: 6,950–7,000.
  • Support: 6,800.
  • Strategy: Consider equal-weight exposure (RSP) vs cap-weight (SPY).
3) NDX — Laggard
  • Outlook: Neutral to bearish — “high bar” into late-Jan earnings.
  • Cap: ~25,850.
  • Downside: 24,650 if earnings disappoint / yields tick up.
  • Strategy: Trim or hedge into Jan 27–30 volatility window.

Key Events to Watch (Jan 2026)

  • Jan 1–15: January Effect dominates; RTY rallies.
  • Jan 15: Q4 earnings season begins (banks/cyclicals) — supportive for SPX/RTY.
  • Jan 27–28: FOMC meeting — dovish confirmation helps; a “hold” signal is risk.
  • Jan 27–30: Big Tech earnings cluster — high volatility risk for NDX.
Research Note • Late Dec 2025
Magnificent Seven: 30-day volatility window

Magnificent Seven: January rebalancing + late-month earnings anxiety

As of late December 2025, the “Magnificent Seven” stocks face a pivotal 30-day window defined by rotation into broader markets (the “January Effect”) and elevated anxiety ahead of Q4 earnings late in the month.

Executive Summary: The “January Rebalancing”

The primary driver for the next 30 days is institutional rebalancing. With the Fed cutting rates to 3.50%–3.75%, capital is rotating out of crowded mega-cap tech trades and into interest-rate-sensitive sectors (small caps/biotech) that benefit more from cheaper capital. While fundamentals remain strong, the “easy money” in the Mag 7 has largely been made for 2025.

Expect volatility and sideways-to-lower price action for most of the group until earnings provide a fresh catalyst in late January.

30-Day Forecast & Drivers by Stock

Stock Current Status Driving Factors (Earnings, Rates, AI, Momentum) 30-Day Forecast
Nvidia (NVDA) Consolidation
~$187		 Factors: Fundamentals robust, but “efficiency” fears (e.g., Deepseek-style cost compression) are emerging.
Rates: Neutral; heavily capex dependent.
Momentum: “Sell the news” risk high. Earnings are late Feb, so it lacks an immediate catalyst. 		Neutral / Volatile
Range: $175 – $195
May underperform software peers as investors wait for Feb earnings.
Tesla (TSLA) Overextended
~$465		 Factors: Driven by retail “animal spirits” and optimistic 2026 robotaxi guidance. Tariffs are a double-edged sword.
Rates: Bullish (cheaper auto loans), but likely priced in.
Momentum: Bearish signal — “shooting star” style reversal; heavily overbought. 		Bearish
Target: $430 – $445
Vulnerable to sharp profit-taking before late-Jan earnings.
Alphabet (GOOGL) Value Play
~$311		 Factors: “Cheapest” of the group (P/E ~20x). Gemini gaining ground; antitrust noise = background static.
Earnings: Feb 3 (est.); ad revenue expected to accelerate.
Momentum: Bullish relative strength; “safety/value” bid. 		Bullish
Target: $320+
Top pick for relative outperformance in January.
Microsoft (MSFT) Steady
~$485		 Factors: “AI monetization” is key — Copilot adoption must justify capex.
Rates: Neutral.
Momentum: Range-bound; needs a clear beat to reclaim/hold $500+. 		Neutral
Range: $475 – $495
Defensive hold; likely capped upside pre-earnings.
Meta (META) Capex Fears
~$657		 Factors: Concern over $70B+ 2026 capex. Ads strong, but spending guidance caps multiples.
Earnings: Jan 29 (est.)
Momentum: Fading at highs. 		Neutral / Bearish
Target: $630 – $640
Risk of a post-earnings dip if capex guidance shocks.
Apple (AAPL) Headwinds
~$273		 Factors: Tariff risk highest (China dependency). “Supercycle” chatter is more a 2026 story than a Jan driver.
Earnings: Jan 29 (est.)
Momentum: Lagging the group. 		Bearish
Target: $260 – $265
Likely a source of funds for rotation into other sectors.
Amazon (AMZN) Fair Value
~$230		 Factors: AWS accelerating (good), retail margins face tariff pressure (bad).
Earnings: Jan 29 – Feb 5 (est.)
Momentum: Tight range; waiting for catalyst. 		Neutral
Range: $225 – $235
Wait-and-see approach into earnings.

Detailed Factor Analysis

1) Earnings expectations (the “high bar”)

  • Timing: Most report in the Jan 27–Jan 30, 2026 window.
  • Narrative: Growth expected to slow vs 2025; market punishes slowing AI revenue or exploding costs.
  • Risk: “Good” is priced; only exceptional guidance drives upside.

2) Rates (Fed ~3.50%)

  • Impact: Rate cut may be “sell the news” for big tech.
  • Rotation: Lower rates boost relative appeal of small caps and yield plays, pulling capital from Mag 7.
  • Specifics: Consumer-rate sensitivity helps AAPL/TSLA over time, but not immediately in Q4 results.

3) AI & “Deepseek” factor

  • Commoditization fear: Cheaper training raises moat questions — headwind for NVDA, potential tailwind for software.
  • Capex ROI: Investors demand proof that GPU spending converts to earnings (MSFT/GOOGL under scrutiny).

4) Momentum & technicals

  • Exhaustion: Group collectively extended; TSLA/META look most vulnerable.
  • January effect: Prior-year winners often lag as profits rotate into laggards.

Summary of actionable forecast

  • Best relative bet: Alphabet (GOOGL) — valuation support + AI catch-up.
  • Highest risk: Tesla (TSLA) — priced for perfection with technical breakdown signals.
  • The trade: Expect MAGS to underperform IWM by 3–5% over the next 30 days.
Research Note • Late Dec 2025
Credit: HY favored in January rotation

Credit January Effect: CDX.NA.HY leads, CDX.EM follows

As of late December 2025, the credit markets are entering a seasonally strong period (“January Effect”) bolstered by recent Federal Reserve rate cuts. The environment favors credit risk, specifically High Yield (HY), which correlates strongly with the forecasted Small Cap (Russell 2000) rally.

Below is the analysis and 30-day forecast for the CDX.NA.HY (North American High Yield) and CDX.EM (Emerging Markets) indices.

Note on pricing

CDX indices generally trade on a Price basis (Price = 100 +/– Upfront payment).
Price UP = Spreads TIGHTER = Bullish (credit conditions improving).
Price DOWN = Spreads WIDER = Bearish (credit conditions deteriorating).

1) CDX.NA.HY (High Yield North America)

Current context: tracking the “risk-on” rotation.

Driving factors

  • RTY correlation: High correlation with small caps; January flows into smaller, rate-sensitive firms can compress HY spreads (prices up).
  • Refinancing relief rally: A Fed path toward ~3.50% reduces maturity-wall anxiety for B/CCC issuers and lowers default probabilities.
  • Sector specifics: Telecom/cable benefits directly from lower rates; energy defaults remain low if oil holds $70–$75/bbl.
  • Search for yield: As cash yields fall, January inflows into HY funds create technical support for tighter spreads.

30-day forecast

  • Direction: Bullish (price higher / spreads tighter).
  • Price forecast: Grind higher, trading at a premium to par (e.g., $101.50 – $102.50).
  • Spread equivalent: Tightening toward 275–290 bps.
  • Rationale: Inflows (technical) + lower default risk (fundamental) = preferred January credit expression.

2) CDX.EM (Emerging Markets)

Current context: currency tailwinds vs. trade headwinds.

Driving factors

  • Dollar factor (DXY): Fed cuts can soften/stabilize USD; a weaker dollar improves EM USD-debt serviceability (prices up).
  • Commodity hopes: China stimulus narratives can lift copper/oil/iron ore, supporting commodity EMs (e.g., Brazil/Chile).
  • Country risks: Tariff rhetoric can cap upside (Mexico/China sensitivities); high-beta EMs (Turkey/Brazil) can outperform in risk-on cut cycles.
  • Liquidity: EM credit is a value trade but thinner liquidity can amplify volatility.

30-day forecast

  • Direction: Mildly bullish (price up, lagging HY).
  • Price forecast: Moderate appreciation with higher volatility than HY.
  • Spread equivalent: Compressing to 230–250 bps.
  • Rationale: Fed tailwind helps, but the “tariff shadow” limits aggressive risk-taking short-term.

Summary forecast table (30 days)

Index Trend Primary driver 30-day outlook
CDX.NA.HY Bullish January inflows & RTY correlation. Yield-chasing as cash rates fall; lower default risk in cyclicals. Price rise. Outperforms EM. Target spreads < 300 bps. Best risk-adjusted credit trade for Jan.
CDX.EM Neutral / Bullish Weaker USD. Fed cuts help serviceability, but trade/tariff fears cap upside. Modest price rise. Higher volatility; likely underperforms US High Yield short-term.

Trading strategy

Conviction trade: Long CDX.NA.HY (selling protection) to capture the January rotation, aligning with the “Small Cap Catch-up” thesis.

Disclaimer: For informational purposes only. Not investment advice.