The S&P 500 extended its upward momentum last week, even as market leadership shifted. Small-cap stocks outperformed large caps, value stocks beat growth stocks, and cyclical sectors moved ahead of defensives.
Research from Capital Economics shows that this type of rotation has appeared in about 13% of weeks since 2000. Yet, when the broader market is also rising, it happens in only 5% of weeks.
Last week marked just the second time in 2025 that all three rotation patterns occurred together with a market advance. Some analysts have compared the trend to the late stages of the dotcom bubble, when small caps gained ground even as the overall market continued climbing.
History suggests that such combinations often precede market pullbacks. Still, Capital Economics highlighted that the recent outperformance of defensive stocks was driven mainly by an “idiosyncratic boost” in healthcare on Friday. Before that, the MSCI USA Defensive Sectors Index was lagging behind cyclicals. In fact, Consumer Staples and Utilities ended the week as the weakest performers in the S&P 500.
The gains for value and small-cap stocks were concentrated on August 12 and 13, following a rally in short-dated Treasury yields after the release of July’s U.S. CPI report. Lower yields usually benefit small caps, since these firms are more sensitive to domestic credit conditions.
Despite the comparisons to 1999, Capital Economics does not view the current trend as a major warning signal. The firm maintains that there is “no compelling reason to expect a severe market rotation or downturn” at this stage.
