GM. This is Milk Road Macro PRO, translating the market’s weird behavior into plain English: tech lagging, commodities exploding, and bitcoin refusing to leave the couch.
Welcome back to another jam-packed report.
This is where we take a bird's-eye view of the most important factors across the global economy and risk asset markets.
We’ll explore what’s happening right now and what might happen next.
Commodities, and particularly precious metal markets, are exploding - what’s going on?
The U.S. stock market is broadening out, and tech is lagging behind - what does this mean?
And what’s going on with bitcoin/crypto? It can’t catch a bid…
Markets are always talking.
Markets are always sending a message.
And right now - markets are speaking loudly and clearly.
In this edition, we will:
- Analyze the amazing “broadening” stock market and what this means.
- Take a look at the big message being sent by small-caps (the most important thing).
- Work out what in the world is going on with the dollar - why is it melting?
- Consider where we are in the business cycle and where things might go next.
- Take a deep dive into what’s going on with the U.S. economy.
- Assess what’s next for the Federal Reserve as a new Chair is nominated.
- Look at how investors are currently positioned and what this means.
This is a deep dive into the most important factors driving markets.
As always, we have a lot of charts to get through (70+).
So, let’s get going…
THE AMAZING “BROADENING” STOCK MARKET
The S&P 500 is very slowly grinding higher - as it has for several months.
But there’s a lot happening underneath the hood.
We still see impressive breadth across the U.S. equity market - a sign of a healthy market.
Below, you can see my “breadth index” including an equal-weighting across 8 risk-sensitive sectors*.
(*Semiconductors, small-caps, transports, biotech, homebuilders, banks, retail, steel.)
It’s currently pushing against its upper bounds, indicating very strong participation across all 8 sectors.
You will typically see a “breadth breakdown” occur before a major risk asset top - and that’s not happening right now.
Generally, good things happen when this index is above 0 (green), and bad things happen when this index is below 0 (red).
The major indices (S&P 500 and the Nasdaq) have been underperforming because the "Magnificent 7” has been struggling.
The Mag 7 as a whole haven't really moved anywhere for four months.
There’s been a clear rotation - out of mega-caps, and into other stuff.
So what “other stuff”?
Cyclical stocks.
Stocks that perform well in environments with accelerating growth and improving economic momentum.
That includes industrials, energy, materials, regional banks, small caps, transports and more.
And this is seen through positioning - investors have been dumping tech and picking up cyclicals.
Transports (trucking, logistics, delivery, airlines, railroads, etc.) is a particularly interesting one.
Transports is probably one of the most “boring” sectors of all - but it’s also one of the most cyclical sectors of all.
And it’s been ripping higher since late last year.
Earlier this month, we got a “Dow Theory Confirmation” as the Dow Jones Transportation Index finally hit a new all-time high, surpassing its previous peak in 2021.
Dow Theory suggests that a major bull market is stronger when both industrial stocks (stuff makers) and transport stocks (stuff movers) “confirm” the bull market.
Industrials moved first, and Transports have now given the green light for the Dow Theory Confirmation.
After previous occasions when the Dow Jones Transports hit a new major all-time high, the S&P 500 was higher one year later 16 out of 17 times, with an average return of +12.4%.
The energy sector is also leading the way higher.
Historically, similar breakouts in energy sector breadth saw the S&P 500 higher 100% of the time 12 months later, with an average gain of 13.6%.
This type of price action tends to occur after bear markets, like the one we saw in early 2025.
The current environment of broad-based cyclical strength is not what you typically see near the end of a risk asset bull market - the current environment is more akin to a cyclical expansion, and is more typical of a mid-cycle, or even early-cycle environment.
We’re now well into Q4 earnings season, and Mag 7 companies are expected to dominate earnings once again with 20.3% y/y growth compared with 4.1% for the "other 493" S&P 500 companies.
But that gap is expected to shrink considerably as we move through 2026 - not because of any slowdown in Mag 7 earnings growth, but because the other 493 are expected to roughly triple their growth.
This is something I have been writing about for a while - I think 2026 is likely not a year for mega-cap outperformance.
The Mag 7 has charged ahead for three years, largely because there was little alternative, as the “real economy” remained somewhat sluggish - and positioning in mega-caps got very crowded.
2026 is likely to be a year of economic reacceleration and potentially “reflation” further down the road, in my view - with a huge number of other viable alternatives now available.
2026 is likely a year for broadening out.
Tech as a whole has been noticeably weak and has underperformed over the past few months (although this may change as we move through Q4 earnings season).
But this isn’t true of all tech - small-cap tech has been moving to new all-time highs.
According to JP Morgan:
"While the Mag 7 dominated retail single names activity throughout 2025, investors have recently begun diversifying beyond these well-known names... Meanwhile, AAPL remains the least favored name that seems to consistently be funding other purchases."
For years, I’ve heard market commentators complaining that the U.S. stock market was “just seven stocks”.
This was surely the reason why a big crash was near, they said.
But now, the market is broadening out - and the Mag 7 are lagging.
Of course, now these same people are complaining that “the biggest stocks are struggling”, and so this is the new reason why a big crash is near…
As tech has underperformed, the Goldman Sachs trading desk has been fielding questions regarding the broadening out trade.
They revealed what they believe are the three main reasons for this:
- Companies have invested significant cash flows into data center infrastructure and concerns continue to grow regarding the returns on investments expected, sometimes debt is used for funding some of these projects.
- Are we measuring the demand for data center capacity correctly, what if there is oversupply?
- The midterm elections could introduce regulatory controls on where data centers are located and controls on utility bill inflation.
Goldman's trading desk “does not expect the first two topics to drive a sell-off in the AI space in 2026”, but they do expect the midterm elections could end up being disruptive for the AI space.
They wrote:
“Our preferred angle to the broadening trade is focusing on the companies that have efficiently implemented AI into their business models, in non-tech related industries.”
This is really the key, and is something I’ve mentioned before - the main focus has clearly shifted from companies directly involved in the AI boom, to companies indirectly involved in the AI boom (firms using AI tools to boost productivity).
Goldman traders have identified five sectors they think are at the forefront of implementing AI into workflows, allowing them to reduce costs and improve margins:
- Banks and insurance companies
- Retailers and warehouse operators
- Transportation and logistics sector
- Health care services
- Restaurants
Elsewhere, it probably won’t have escaped your attention that we’re in a raging commodity bull market.
Gold and silver have been exploding higher and have attracted headlines and attention.
But a word of warning - gold, and particularly silver, are "stretched" on basically every metric you look at.
I wanted to warn you all about silver in this report - but it looks like it's too late…
Silver dropped roughly 30% in just a few hours on Friday - and it’s shown all the classic signs of a blow-off top.
And historically, when precious metals blow off - it can take decades to return to the same price levels.
Take a look at this…
Monday, January 26, 2026, saw SLV (the largest U.S. Silver ETF) trade $38B in total value - the highest value ever traded.
If we compare this to volumes in SPY (the largest ETF in the world) on Monday ($42B), SLV has only traded this much relative to SPY once before…
That was April 11, 2011…
A large part of the silver run-up came from fever-pitch retail demand in China, which only has one silver fund - and demand was so frenzied that at one point it traded at a 42% premium to spot prices.
As far as I’m concerned, the silver rally has detached from all fundamental reasoning and is purely a speculation-driven pump.
I don’t think I’ve ever seen a chart of any asset class go vertical and then go sideways.
Vertical up almost always leads to vertical down.
And Friday proved my point…
On commodities, don’t lose sight of the fact that the whole commodity complex (including industrial metals and energy) has only just taken off from a multi-year basing pattern.
Commodity index charts (tracking a basket of commodities) look excellent.
This is the kind of price action that occurs during business cycle expansions (more on that later).
I think the next big commodity trade is probably in industrial metals like copper, aluminium, and lithium, as a business cycle expansion kicks into gear.
Finally, bitcoin continues to be very sluggish.
A broadening stock market with cyclical outperformance should be an excellent environment for bitcoin/crypto.
It’s a cyclical expansion, it’s an economic reacceleration.
But bitcoin just can’t get going (yet, at least).
However, as I’ve mentioned previously - we saw a big “speculation smash” across the equity market in Q4, and “appetite for speculation” has not yet conclusively returned.
My gauge of speculation appetite - BUZZ/SPX* - is still subdued.
*BUZZ (the hottest, speculative, “retail favorite” stocks based on sentiment) relative to SPX (broad large cap stocks).
BUZZ/SPX is the best stock market proxy for bitcoin.
Bitcoin likely won’t get moving until speculation returns across wider markets.
But the macro environment is fully in place for bitcoin to get moving…
The fact that it isn’t doing so is slightly concerning…
SMALL-CAPS HAVE A MESSAGE FOR YOU (AND CRYPTO)
Small-caps (Russell 2000) are the most important thing to watch right now, in my view.
I have been mentioning small-caps for months in PRO Reports - but now it’s time to sit up and really pay attention.
Because small-caps have a message for you.
The Russell 2000 price chart is a huge signpost showing where we are currently and where things might go next.
Mega-caps are largely shielded from “the real economy” and can run in most environments, as long as it’s not horrendously “risk-off” with growth deteriorating rapidly. A lot of mega-caps are essentially “global stocks”.
But small-caps are essentially a pure read on “the real economy” - and are much more domestically focused.
Small-caps are much smaller (obviously), arguably more “speculative” (or at least, less “safe”), more interest rate sensitive, more growth sensitive, and more inflation sensitive.
Small-caps need the perfect cocktail to perform well.
The Russell 2000 running hard carries a very specific message:
- Growth outlook is favorable.
- Inflation outlook is favorable.
- General economic/consumer outlook is improving.
And the Russell 2000 is currently breaking out of a multi-year consolidation.
As far as I’m concerned - after a small fake-out in late 2025 - this is now a conclusive breakout.
Over the last 40 years, the Russell 2000 has only seen six major multi-year breakouts (prior to this most recent one).
Post-breakout, the Russell’s average rally was 49%.
Only one of these six breakouts could be considered a “false signal”: the early 2000s.
So, when the Russell breaks out from a multi-year consolidation - it’s usually the real deal (but not always).
Additionally, this current Russell breakout comes after one of its longest consolidation periods in history.
Prior to the breakout, the Russell had been stuck below its 2021 high for four years.
That means this breakout likely carries even more importance (like a coiled spring).
The biggest breakouts in Russell’s history were:
- 1991, a 4-year breakout, it rallied for 4 years, gaining +180%.
- 2004, a 4.5-year breakout, it rallied for 3 years, gaining +40%.
- 2013, a 6.5-year breakout, it rallied for 2.5 years, gaining +50%.
I have talked a lot about the perceived “AI bubble” in recent PRO reports.
This is debatable - some people think we are in a bubble, some think we aren’t.
But is this the biggest bubble currently?
Nope.
Not even close.
There is another - bigger - bubble.
A much bigger bubble.
And that’s the bubble in experts telling me the American economy is shaped like the letter K.
The “K-shaped economy” is the most consensus view on the planet currently.
According to everyone, the “K-shaped economy” is not debatable and is a self-evident fact - and will continue, presumably forever.
The “K-shaped economy narrative” bubble cannot possibly get any bigger, because this particular bubble encapsulates near-enough 100% of market commentators.
In aggregate, the U.S. economy has been resilient in recent years, presumably held up by higher-income consumers - while lower-income consumers have struggled.
This can be seen most clearly through the huge divergence between plunging soft economic data (surveys) and incredibly resilient hard economic data (actual, real data).
So, what happens if the soft data improves, and the lower half of the “K” begins to feel better about things?
When the University of Michigan’s Consumer Sentiment survey is on the floor (like it is now) - it’s a time to be bullish, not bearish, from a statistical perspective.
And here’s the key.
Long periods of falling consumer sentiment always coincide with a multi-year consolidation in the Russell 2000 (remember, the Russell is the “real economy”).
And when the Russell 2000 emerges from a multi-year consolidation, Consumer Sentiment rises - every time.
And on two of those occasions, when consumer sentiment was as low as it is now, the upside surprise was massive.
Markets are always talking - and markets carry a huge amount of signal.
If this Russell 2000 breakout is the real deal, history suggests consumer sentiment is likely to rise moving forward, and there’s a strong chance that there’ll be a major turnaround.
A rising consumer sentiment backdrop would change everything.
Which brings us back to how…
Stock analysts have complained about “poor breadth” for years (very consensus).
Economists have complained about the “K-shaped economy” for years (the most consensus view on the planet).
After coming off an historically low recent reading, the latest consumer sentiment report was revised up to a five-month high.
Driven by upward revisions to current conditions …
… and upward revisions to future expectations.
Additionally, inflation expectations were revised down.
What if the winds are finally changing…?
- Small-cap strength could be a major leading indicator for a recovery in consumer sentiment and “the real economy”.
- A broadening stock market should be front and center to every fundamental framework this year - and should be seen as a welcome change.
- Stocks haven’t seen a setup like this in years, and history suggests the potential upside is real.
If history rhymes:
- Consumer sentiment could rise all year.
- Small-caps will significantly outperform.
- Cyclical stocks and commodities should perform well.
- Rising confidence could support the growth trajectory and potentially lead to a virtuous cycle.
What else did those previous Russell 2000 rallies have in common?
They all occurred during the strongest phase of global equity bull markets.
Most recently in 2013/2014, 2016/2017, and 2020/2021 - nearly all global stock markets were in uptrends.
And right now, we are in an absolutely raging global bull market.
The vast majority of international stock markets are outperforming the major U.S. indices.
(Has anybody looked at the South Korean stock market - KOSPI - recently?)
Below, I’ve combined the major stock indices from the largest 40 countries into one index.
It’s currently surging higher - equivalent to 2013/2014, 2017, and 2021.
And all of this means it’s probably time for bitcoin/crypto to “put up or shut up”.
The time for talking is over.
Every major Russell 2000 breakout was followed relatively shortly afterwards by a major bitcoin breakout.
There’s obviously not a huge amount of data to go on, but this is true 100% of the time, so far.
If the Russell 2000 breakout holds and accelerates - it’s time for crypto to get on its bike.
Or in other words - it’s now (or at least soon), or never.
That’s probably too dramatic, but you get my point.
The Russell 2000 continuing to run and crypto remaining sluggish would be a huge red flag for the crypto world.
If crypto can’t perform in that environment - it’s not looking good.
The chart below shows earnings growth estimates - and it’s clear that now is the time for small-caps (assuming these estimates are broadly correct, which is a big assumption).
The Russell has already been on a relatively big run in the past couple of months, and valuations are no longer “inexpensive”, according to Goldman Sachs.
But they are far from “stretched”, and can run further before we reach the levels seen in 2021.
Positioning in small caps has increased - but there’s plenty of room for it to rise further.
Fund flows since the start of 2020 are “$1.6T inflow to U.S. large cap vs. $6.1B outflow from small cap".
What happens if even a tiny portion of those large-cap flows rotate into small caps?
Uh, Oh… 😧 The rest of this report is exclusive to Macro PRO & PRO All Access members!
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WHAT’S LEFT INSIDE? 👀
- Looking in-depth at the dollar - it’s been moving a lot, but what’s going on?
- Taking a deep dive into the business cycle - where are we and where are we heading next?
- Analysing the U.S. economy - how’s it shaping up and what does it mean for markets?
- Discussing what’s next for the Fed - there could be a big shake-up at the central bank.
- Thinking about how investors are currently positioned and what this means looking ahead.
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