While Big Tech Gets the Headlines, Small-Caps Are Rallying. Will It Last? — Barrons.com

Dow Jones Newswires

Knight-Swift Transportation

+0.69%

By Jack Hough

Tesla Optimus robots will be the best surgeons on Earth by decade's end, Elon Musk recently predicted. Walmart is partnering with Alphabet to expand aerial drone delivery to 40 million customers next year, up from two million. And Walt Disney is retheming its Rock 'n' Roller Coaster at Hollywood Studios to feature The Muppets. OK, maybe scratch that last one, but cases abound of big companies pursuing stunning innovations. So, why have small-cap stocks been outperforming since mid-November? Is it just a blip, or the start of a long-awaited resurgence?

It's more than a blip, and the reasons go beyond "small-caps are due" or "they're cheap" or "this feels so wrong that maybe it's right." For example, a yearslong earnings recession for small companies appears to have lifted. Whether their stock rally endures could depend on manufacturing and the bond market. But let's start with due and cheap.

Small-caps have historically soared and slumped over stretches lasting close to a decade, on average. There was an epic rally from the mid-1970s to the early 1980s. A landmark research paper published in 1981 documented what became known as the small-company effect — the long-term tendency of these stocks to outperform. But soon after, small-caps entered a funk that would last until the popping of the dot-com stock bubble in 2000. Then they outperformed for nearly a decade.

The current underperformance streak is a historically long one. A 15-year investor in the S&P 500 index of large companies has made 608%, but the S&P SmallCap 600 has returned only 353% over that period, and the Russell 2000, another popular small-cap index, 303%. So, maybe small-caps are due — although being due is a concept that means a lot for pregnancy but nothing at all for roulette tables, and if I had to pick which one a bet on small-caps more resembles, it wouldn't be pregnancy.

On to cheap, then. The S&P SmallCap 600 trades at 18 times 2025 earnings, a smidgen above average, but the S&P 500 goes for 25 times earnings, which is expensive. So, small-caps trade at a relative discount, but it depends on which index you use. The Russell 2000 is 41 times 2025 earnings. The difference between the two indexes is that the 600 requires that constituent companies be profitable, and the 2000 doesn't, which means it's packed with hot and messy companies, and I mean that lovingly, because sometimes investors are into that. Since the beginning of November, the Hot & Messy 2000 has returned 9.2%, versus 7.6% for the Small But Serious 600 and 3.9% for the Big & Pricey 500.

Abysmal earnings have held back small-caps in recent years. Since the late-2022 introduction of ChatGPT to the public, large-company earnings have marched higher each year, by a cumulative 27%, fueled by frantic spending on artificial intelligence. But small-company earnings over that period fell 12% and recovered, for a cumulative rise of just 1%. Compared with large companies, small ones tend to be more sensitive to domestic manufacturing, which has shrunk for years, and to higher tariff costs.

Small-company earnings are picking up, however. This year, the S&P 500 and the SmallCap 600 are both expected to see 15% earnings growth. For the Russell 2000, whose earnings are more volatile and are still climbing back from recession, this year's growth is pegged at 66%.

Jill Carey Hall, who oversees small-cap stock strategy for BofA Securities, expects small companies to benefit from interest-rate cuts and a trickling down of capital spending by big companies. Her research shows that in years when small-cap earnings exceed large-cap earnings and accelerate, as she expects this year, small-caps have outperformed 75% of the time by an average of nine percentage points a year. Over longer periods, valuations matter most. If the past link between price/earnings ratios and subsequent stock performance holds, small-caps could return 9% annually over the next decade, versus 1% for large-caps.

There are exchange-traded funds for adding small-cap exposure with low fees, like Vanguard S&P Small-Cap 600, or, given BofA's current preference for value, iShares S&P Small-Cap Value. The firm recently published its top small-cap picks for 2026. Names include Alaska Air Group, Duolingo, elf Beauty, Knight-Swift Transportation, and Southwest Gas Holdings.

The main risk to a small-cap rally is a further downturn in manufacturing. Shares have tended to move with the Institute for Supply Management's PMI Manufacturing index, which tracks data from purchasing executives. That, in turn, has tended to respond to changes in 10-year Treasury yields. As for those, well, let's quickly change topics. Sort of.

The Trump administration recently announced a big purchase of mortgage securities. The goal: to bring mortgage rates down to provide quick help with home affordability ahead of midterm elections, says Jonathan Hill, head of inflation research strategy at Barclays. But spreads between mortgages and Treasuries are squeezed, so what's really needed are lower 10-year Treasury yields. Short-term rate cuts aren't helping much there. Bond buyers have turned grumpy over endless deficits, and what looks like a politically motivated criminal investigation of the Federal Reserve chair.

But the administration isn't powerless. Hill outlines three examples. The first is tweaking bank capital requirements in ways that promote large Treasury purchases. The second is the Treasury issuing bills to fund a buyback of longer issues, which is directionally similar to the Fed's Operation Twist in 2011 and 2012. Third, Treasury could simply cut supply by issuing fewer bonds and more bills.

"This is clearly a very creative administration that comes up with a lot of ideas and pushes them through where people aren't necessarily expecting," he says. He'll be watching President Donald Trump's speech in Davos, Switzerland, later this month for clues on what those creative ideas mean for bonds.

Write to Jack Hough at jack.hough@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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Why Duolingo (DUOL) Shares Are Falling Today

Stock Story

Duolingo

-2.81%

What Happened?

Shares of language-learning app Duolingo fell 6.6% in the afternoon session after the company announced a CFO transition and provided preliminary fourth-quarter results that appeared to concern investors.

The company named board member Gillian Munson as its new Chief Financial Officer, who will replace Matt Skaruppa. While Duolingo also shared positive preliminary Q4 metrics, including daily active user growth of approximately 30% and bookings at or above its prior guidance, investors focused on the leadership change. Concerns were heightened by the company's stated plan to prioritize product investment over near-term financial performance. Adding to the pressure, Wells Fargo lowered its price target on the stock to $160, citing weaker-than-expected daily active user growth. The negative sentiment sent the stock to a 52-week low during the session.

What Is The Market Telling Us

Duolingo’s shares are extremely volatile and have had 43 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.

The previous big move we wrote about was 28 days ago when the stock dropped 4.5% on the news that technical factors and a bearish sentiment among traders led to a sell-off.

The decline happened without any major company-specific news releases or other clear fundamental drivers. Instead, the move appeared to be driven by market mechanics. At the time, technical analysis indicators were largely signaling a bearish outlook, with significantly more signals pointing downwards than upwards. This kind of setup often encourages selling when there is no positive news to support the stock's price.

Duolingo is down 6.9% since the beginning of the year, and at $164.29 per share, it is trading 69.6% below its 52-week high of $540.68 from May 2025. Investors who bought $1,000 worth of Duolingo’s shares at the IPO in July 2021 would now be looking at an investment worth $1,182.

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Duolingo stock falls after CFO transition announcement

Investing.com

Advanced Micro Devices

Investing.com -- Duolingo (NASDAQ:DUOL) stock fell 6.5% Monday after the language learning platform announced a CFO transition and provided preliminary fourth quarter results.

The Pittsburgh-based company said Gillian Munson will take over as Chief Financial Officer on February 23, 2026, replacing Matt Skaruppa who is stepping down after nearly six years with the company. Munson has served on Duolingo’s Board of Directors since 2019 as Chair of the Audit, Risk and Compliance Committee.

Alongside the executive change, Duolingo released preliminary metrics for the fourth quarter of 2025, reporting daily active user (DAU) growth of approximately 30% YoY. The company also indicated that bookings are expected to be at or slightly above the high end of its previously announced guidance range of $329.5 million - $335.5 million.

Despite the positive preliminary results, investors appeared concerned about the leadership change and the company’s stated intention to prioritize product investment over near-term financial performance.

"We’re prioritizing teaching better and user growth, and we executed on that strategy in the fourth quarter," said Luis von Ahn, Duolingo’s Co-Founder and CEO. "We plan to continue to invest meaningfully in the product, even when it involves near-term tradeoffs."

Skaruppa will remain CFO until Munson starts her new role, at which time he will transition to an advisory position to help ensure a smooth handover.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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Lululemon and Walmart gain premarket; Citigroup, American Express and Exxon fall

Investing.com

Advanced Micro Devices

Investing.com -- U.S. stock futures fell Monday amid concerns over the independence of the Federal Reserve as political pressure rose on Chair Jerome Powell.

Here are some of the biggest premarket U.S. stock movers today:

Lululemon Athletica (NASDAQ:LULU) stock rose 0.4% after the sportswear retailer said it expects fourth-quarter revenue and profit to be toward the high end of its previous forecast range on the back of strong demand during the holiday season.
Citigroup (NYSE:C) stock tumbled 4%, JPMorgan Chase (NYSE:JPM) fell 3%, Bank of America (NYSE:BAC) dropped 2.5% and credit card lender American Express (NYSE:AXP) shed 4.8% after President Trump called for a one-year cap on credit card interest rates at 10% starting on January 20.
Apple (NASDAQ:AAPL) stock fell 0.2%, outperforming the wider market after Counterpoint Research said the tech giant led the global smartphone market in 2025 with a 20% share as shipments rose 2% year-on-year.
Exxon Mobil (NYSE:XOM) stock fell 0.8% after President Trump said he may sideline the oil major from Venezuela’s energy sector, criticizing the company’s response to his push for U.S. oil producers to move quickly back into the country.
Walmart (NASDAQ:WMT) stock gained 3%, with the retailing giant, which shifted its listing to the Nasdaq from the NYSE last month, was set to join the Nasdaq‑100 index on January 20.
Duolingo (NASDAQ:DUOL) stock fell 1.9% after the company announced Chief Financial Officer Matt Skaruppa will step down after nearly six years in the role, marking the departure of a key executive who helped the language-learning app maker go public.
Sun Country Airlines (NASDAQ:SNCY) stock soared 14% after Allegiant Travel (NASDAQ:ALGT) agreed to buy the company in a $1.5 billion cash-and-stock transaction, further driving consolidation in the U.S. airline industry.

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Boeing stock rises after Alaska Airlines places largest fleet order in its history

Investing.com

Investing.com -- Boeing (NYSE:BA) stock rose 1.4% Wednesday after Alaska Airlines announced its largest aircraft order in company history, purchasing 105 737-10 aircraft and 5 787 widebody aircraft from the aerospace manufacturer.

The order extends Alaska’s delivery stream through 2035 and includes options for 35 additional 737-10 aircraft. Alaska Air Group (NYSE:ALK) shares gained 2% following the announcement.

This purchase brings Alaska’s total Boeing orderbook to 245 aircraft, adding to the 94 MAX aircraft already in its fleet. The airline will also welcome its first 787 widebody aircraft featuring Alaska’s new global livery, which will operate on routes to Europe and Asia.

"This fleet investment builds on the strong foundation Alaska has created to support steady, scalable and sustained growth," said Alaska Airlines CEO Ben Minicucci in the announcement.

The five additional 787 widebody aircraft will support Alaska’s strategic expansion plans, enabling the airline to serve at least 12 long-haul international destinations from Seattle by 2030. This brings the carrier’s firm future 787 widebody fleet to 17 aircraft, with five already in operation.

Alaska Air Group expects its fleet to grow from the current 413 aircraft to more than 475 by 2030 and exceed 550 by 2035. The airline has already announced several international routes from Seattle, including London, Rome, Reykjavik, Tokyo, and Seoul.

The order represents a mix of growth aircraft and replacements for aging 737s, helping Alaska maintain one of the youngest and most fuel-efficient fleets among premium global airlines.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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AI Is 'Transformative' for Economy. Duolingo and 5 Other Stocks to Play the Shift. — Barrons.com

Dow Jones Newswires

By Adam Clark

Is artificial intelligence overhyped? Not a chance, according to analysts at Truist Securities. They say AI will shake up the entire economy and are recommending six stocks set to win in the new era.

"We view GenAI as a transformative, general-purpose technology with the potential to change entire industries and work as we know it," wrote Truist analyst Arvind Ramnani in a research note.

Language-learning platform Duolingo, consulting outfit Accenture, tax-preparation business Intuit, AI-powered lender Upstart Holdings and insurance-technology companies Lemonade and CCC Intelligent Solutions are stocks that will benefit, according to Ramnani. He and his colleagues initiated coverage of each with a Buy rating.

The recommendations are based on each company's ability to provide specialized AI capabilities to their customers. That should help them avoid losing their businesses to generalist models such as OpenAI's ChatGPT.

"In our view, value will migrate away from commodity capacity (such as generic APIs or undifferentiated tech) and toward platforms that have proprietary data, embedded AI and domain-specific work flows (such as Intuit, Upstart, Lemonade)," wrote Ramnani. "Companies that translate inexpensive inference into high-value outcomes (such as Duolingo, Upstart) should compound returns, while those treating AI as a bolt-on feature will face commoditization pressure.

Duolingo is a particularly interesting case because the stock has flipped between being seen as an AI winner and a loser from the technology. Early last year, the shares surged on optimism over how the language app's investment in technology could make it more efficient in creating content. But the stock was crushed in the second half of 2025 as investors focused on the threat from AI-powered competitors and translation tools.

Ramnani is backing a rebound, setting a target price of $245 for the stock. Duolingo shares were trading at around $188 a share on Tuesday.

"The company is already utilizing GenAI coding tools to develop new products, and we believe its deep user data and expertise in gamifying learning/engaging users will continue to provide defensible advantages even as AI natives enter the market," Ramnani wrote.

While recent concerns have focused on slowing growth in Duolingo's daily count of active users — it fell to 36% in its most recent earnings report from 40% in the preceding quarter — the Truist analyst focused on rapid increases in the subscriber base. Annual growth in subscription revenue has been at least 45% for 16 consecutive quarters, he said.

Ramnani said his base case assumes Duolingo's revenue will grow 26% to $1.3 billion in 2026 as the number of users keeps rising strongly. He also expects Duolingo to expand its adjusted earnings margin.

Write to Adam Clark at adam.clark@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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Airlines to benefit from low capacity and high demand, BofA upgrades Allegiant

Investing.com

Advanced Micro Devices

-17.31%

Investing.com -- U.S. airlines will see steadier 2026 on strong domestic demand and lower capacity growth.

According to Bank of America the limited supply growth and a recovery in demand, led by premium travel, should help unit revenues.

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BofA says the industry continues to structurally favour larger carriers, which it expects to gain share and expand margins. Delta Air Lines, United Airlines and Alaska Air Group generate strong cash and have improving earnings profiles.

Delta Air Lines Inc (NYSE:DAL) and United Airlines Holdings Inc (NASDAQ:UAL) to generate more than $3 billion and $2 billion in free cash flow, respectively, in 2026, as per BofA.

Alaska Air Group Inc (NYSE:ALK) has premium exposure, growth in its loyalty program and with the completion of the Hawaiian Airlines integration should drive its earnings recovery in 2026.

Delta which usually reports first, will publish results on January 13. It likely benefit from a positive gap between unit revenue and unit cost growth, supporting higher earnings forecasts.

The first half of 2025 was volatile for airlines. Because 2025 started so poorly, the growth numbers for the first half of 2026 are going to look spectacular by comparison.

Bank of America sees domestic capacity growth of about 2.5% in 2026, and that can go lower if Spirit Airlines shrinks more aggressively during its bankruptcy process.

Bank of America downgraded Frontier Group to Underperform on challenging cost outlook and limited earnings visibility despite solid revenue growth.

While it upgraded Allegiant Travel to neutral given flatter capacity, better unit revenues and cost control as new Boeing jets are deployed.

Valuations of airlines will continue to be driven by unit revenue momentum, with structural winners likely to command higher multiples than the rest of the sector.

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