The Great Rotation Accelerates: Small Caps Surge as AI Trade Cracks

The Daly Asset Management Fund is Officially Live

After months of building, backtesting, and refining, Daly Asset Management is officially live.

You can now invest directly in our systematic, data-driven strategies at dalyassetmanagement.com. This isn't your advisor's 60/40 portfolio. This isn't another closet index fund charging active fees. This is quantitative investing built for sophisticated, self-directed allocators who understand that alpha comes from being systematically contrarian, not chasing whatever CNBC is pumping today.

The market is rotating. Concentration is cracking. And the strategies we've deployed are built for exactly this environment.

Corporate Overview

The final trading week of 2025 delivered a message Wall Street hasn't heard in years: concentration kills alpha.

While the S&P 500 dipped 0.5% and the Nasdaq shed 1.4% this week, the Russell 2000 surged past 2,600, hitting fresh all-time highs. The Dow — yes, that dinosaur index — added over 1% and reached intraday records at 48,835. This is capital rotation at industrial scale.

The thesis is simple: After a decade of mega-cap dominance fueled by ZIRP, QE, and AI hype, investors are fleeing overextended valuations and hunting domestic, cyclically-sensitive names that actually benefit from lower rates. Small caps — levered to floating-rate debt and U.S. economic growth — are the primary beneficiaries.

At Daly Asset Management, we don't chase narratives. We build systematic, data-driven strategies that capitalize on structural market inefficiencies. While Wall Street was piling into the Magnificent Seven, we identified the valuation gap widening between growth and value, between mega-caps and mid-caps, between momentum and mean reversion.

The Great Rotation isn't coming. It's here.

Stock of the Week: Micron Technology (MU)

Ticker: MU | Sector: Semiconductors | Market Cap: ~$280B | Div Yield: 0.4%

Micron crushed Q1 earnings this week with $13.64B in revenue (up 57% YoY) and guided Q2 to a staggering $18.7B — nearly $4B above consensus. The company is completely sold out of HBM (high-bandwidth memory) through 2026, with CEO Sanjay Mehrotra projecting the HBM market will explode from $35B in 2025 to $100B by 2028.

This isn't just another AI play. This is structural oligopoly economics. Only three companies globally can produce HBM at scale: Micron, SK Hynix, and Samsung. Supply constraints are acute, demand is insatiable, and gross margins expanded to 56.8% as the company shifts from commodity DRAM to high-value AI chips.

The stock surged 12%+ on Thursday but still trades at reasonable multiples given the multi-year visibility. With management guiding to only meeting 50-70% of customer demand, pricing power is locked in.

Risks to Watch: Memory is historically cyclical. If hyperscalers pause AI capex or if a glut emerges post-2026, margins compress fast. Samsung could catch up in HBM4 yields. Tariffs on semiconductor equipment remain a wildcard.

Verdict: We're long because Micron is essential infrastructure for the AI buildout. This isn't speculation on software valuations — it's supply-demand fundamentals in a three-player oligopoly with multi-year sold-out order books.

Market Snapshot (Week of December 15-19, 2025)

*Russell closed week at highs after hitting intraday record of 2,596 on Thursday.

The divergence is stark. Defensives and cyclicals outperformed while tech bled. This wasn't a risk-off rotation — VIX stayed subdued below 17. This was a quality rotation into domestically-focused earnings with less valuation risk. Money flowed from Nasdaq losers (Broadcom -11%, Oracle -12% on the week) into regional banks, industrials, and small-cap value. The 10-year yield stabilizing near 4.15% provides a Goldilocks backdrop: high enough to avoid recession fears, low enough to not crater growth multiples.

Market Commentary

The Fed's Hawkish Cut: Theater, Not Policy

The Federal Reserve delivered its third consecutive 25bp cut on December 10, bringing the Fed Funds rate to 3.50-3.75%. But the real story was the dot plot: policymakers now project just one more cut in 2026 and another in 2027, landing at 3.00-3.25% terminal rate.

Markets got the message. This is the end of easy easing.

The vote itself was messy — 9-3, with three dissents (Miran wanted 50bp, Goolsbee and Schmid wanted no cut). Powell's language shifted back to 2024 phrasing: "carefully assess incoming data" — Fed-speak for "we're done unless something breaks."

The subtext? The Fed believes it's reached neutral. Core PCE is projected at 2.6% for 2026, unemployment around 4.3%, and GDP growth upgraded to 2.3%. This isn't a dovish Fed worried about recession. This is a Fed worried about reigniting inflation if they cut too fast.

CPI: Data Integrity Matters More Than Headlines

Thursday's CPI print showed inflation at 2.7% YoY, down from 3.0% in September, with core CPI at 2.6% — the lowest since March 2021. Markets initially cheered, pushing Nasdaq up 1.7%.

But here's the problem: the October data doesn't exist. The 43-day government shutdown meant the BLS couldn't collect October prices, and November data collection started mid-month. Economists are rightfully skeptical. NY Fed President John Williams admitted the data is "distorted" by technical factors, likely understating inflation by ~10bp.

Translation: December's CPI (released mid-January) will be the real tell. If November captured more Black Friday discounting and less October baseline pricing, we could see a snapback. Don't extrapolate one noisy data point into a trend.

The AI Trade Splinters

Broadcom plunged 11% last Friday despite beating earnings, on margin compression fears. Oracle cratered 12.7% over the week after missing revenue. Even Nvidia wobbled, though it recovered Thursday after Micron's blowout earnings validated AI infrastructure demand.

The narrative is shifting from "AI will change everything" to "which AI companies actually have moats?" Investors are realizing that infrastructure capex doesn't automatically translate to software margins. Data center buildouts are real, but so is competition, and hyperscaler budget constraints in 2026 could bite overextended names.

Small-Cap Breakout: Structural or Technical?

The Russell 2000 is now up ~14.7% YTD, outpacing the S&P's 13% and Dow's 11.4%. This is the widest small-cap outperformance in over a decade.

Why? Lower rates disproportionately benefit small caps, which carry more floating-rate debt and rely on bank financing. The Fed's three cuts in 2025 have reduced borrowing costs meaningfully, and expectations for at least one more cut in 2026 provide a tailwind. Additionally, Russell 2000 earnings are projected to grow 35% in 2026 vs. 14% for the S&P, reflecting easier comps and operating leverage kicking in.

This broadening isn't just technical. It's fundamental. Investors are rotating into domestically-focused companies levered to U.S. growth, not global tech monopolies with stretched valuations.

Energy & Commodities: The Forgotten Rotation

Crude oil has been range-bound near $70 WTI all quarter, but OPEC+ continues to unwind production cuts, prioritizing market share over price discipline. The structural story for 2026 is bearish: the IEA projects a 4 million bpd surplus with non-OPEC supply (U.S., Brazil, Guyana) surging.

Gold, meanwhile, continues its grind higher — up 59% YTD through October — driven by central bank buying, geopolitical hedging, and the dollar weakening off its 2025 highs. With the Fed signaling a pause, real rates aren't climbing aggressively, leaving gold in a structural sweet spot.

Tactical Map: Where to Lean In

• Small-cap value with pricing power: Regional banks, industrial distributors, specialty finance. Look for companies with <15x P/E, positive FCF, and exposure to domestic capex cycles.

• AI infrastructure plays with scarcity value: Micron, memory/storage oligopolists, data center REITs. Avoid crowded software multiples.

• Energy services & midstream: If crude stabilizes $65-75, service names with deferred maintenance backlogs offer asymmetric upside.

• Gold miners with operational leverage: Majors trading below NAV with rising production profiles. Gold at $2,650 with potential Fed pause = margin expansion.

• Selective mega-cap tech on weakness: Not all tech is overvalued. Look for names with actual earnings, buybacks, and secular tailwinds (cloud infrastructure, cybersecurity, payments).

Theme to Watch: Domestic Onshoring & The Rust Belt Renaissance

The structural trend everyone is underestimating: U.S. manufacturing reshoring.

Trump 2.0 tariff policy, CHIPS Act subsidies, and supply chain re-regionalization are driving a multi-year capex cycle in domestic manufacturing. Micron is receiving billions in CHIPS Act grants for fabs in New York and Idaho. Intel, TSMC, and Samsung are building U.S. capacity. Defense contractors are nearshoring electronics production.

This isn't just about chips. Industrial automation, power infrastructure, logistics, and construction materials are all beneficiaries. Companies exposed to Rust Belt factory buildouts — from Caterpillar to niche industrial distributors — are positioned for a decade-long tailwind.

The implications: inflation stays structurally higher (domestic labor costs > Chinese imports), small-cap industrials outperform, and real assets (commodities, land, equipment) regain pricing power. This is the real "Make America Great Again" trade, and it's far more durable than campaign rhetoric.

Forward View: Week of December 23-27, 2025

Shortened holiday week. Key events:

• Dec 23: Consumer Confidence (Conf Board) — watch for small business sentiment.

• Dec 26: Markets closed (Christmas observed).

• Dec 27: Thin trading, year-end window dressing likely. Large-cap winners may see tax-loss selling, small-cap winners may see momentum chasing.

• Technical Levels: S&P support at 6,750, resistance at 6,900. Russell 2000 needs to hold 2,520 to maintain breakout structure.

Expect low volume, headline risk from geopolitical developments (Middle East, Ukraine), and positioning for January CPI (released Jan 13). If December inflation data comes in hot, expect a sharp reassessment of Fed 2026 cuts.

Final Words

The market is sending a clear signal: the era of passive index dominance and mega-cap concentration is fracturing. The Russell 2000 hitting records while Nasdaq bleeds isn't a blip — it's a structural rebalancing.

This is exactly the environment where active, systematic strategies outperform. The indexers who rode the S&P for 15 years are about to learn that market-cap weighting becomes a liability when leadership broadens.

At Daly Asset Management, we've been positioning for this rotation. No hidden fees. No closet indexing. Just data-driven strategies built to exploit inefficiencies that Wall Street's AUM factories can't touch.

2026 won't be about picking the next AI narrative stock. It will be about identifying value, understanding rate sensitivity, and recognizing which sectors benefit from a structurally changed macro regime.

We're not here to follow the herd. We're here to front-run the rotation.

See you next week,

— Daly AM

Disclosures: This newsletter is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Always conduct your own due diligence or consult with a financial advisor before making investment decisions.