“The four most dangerous words in investing are: ‘this time it’s different.’” – Sir John Templeton
The stock market got off to a good start to the year, with all the major indexes we follow posting positive returns for the month. Much like last year, international indexes outperformed the S&P 500. Unlike 2025, the S&P 400 and S&P 600 outperformed the large-cap indexes. Commodities were up, the US Dollar was down, and bonds were a little bit better than break-even.
All data as of 02/02/2026, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
The start of a new year often brings a shift in how markets see the world, and January delivered exactly that. Leadership changed hands in ways we haven’t seen for some time—small and mid‑caps outpaced the mega‑caps, value decisively beat growth, and international markets continued to outperform U.S. stocks. On the surface, this could simply be a normal rotation, the kind of recalibration that happens when investors reassess positioning after a strong prior year. But the breadth and consistency of these shifts suggest it may be more than routine. It raises a bigger question—one worth exploring carefully—about whether we are approaching a genuine “this time is different” moment in markets.
The famous Sir John Templeton quote at the top of the page can be a double-edged sword for investors who lack a full understanding of what he was saying and how it applies to their investments. For instance, Templeton concedes that on rare occasions, underlying market or economic factors really do make the future different than the past. Geopolitical change, such as the US global domination in the post-World War 2 period, is a good example. On the technology side, we would also add the electrification of the 1920s and the internet revolution of the 1990s into the “this time is different” category.
In retrospect, it is plain to see the few times when transformational changes to society have happened, and how one would be best invested for those changes. Of course, reflective analysis is easy; real-time decision-making is much more complicated. Real-time investing has its dangers.
The danger in investing for a paradigm change, however, is two-fold. Every boom or bust is not a change in historical patterns. Sometimes a bear market for the market or a sector of the market is just a bear market. The other danger is, ironically, many of the calls we have heard over the years of “this time is different” have come as justification for a stock market at extreme levels. For example, in the late 1990s, many an analyst justified with what sounded like compelling reasons at the time why that bull market should be everlasting with permanently high market valuations.
The Macro Backdrop: The U.S. Dollar’s Weakening Trend
The value of the U.S. Dollar against other currencies has trended over a wide range. Over the past 25 years, there have been two periods of structural dollar weakness and a long period of structural dollar strength. In our view, there are three key drivers of these cycles:
- Monetary Policy & Yields: Hawkish Federal Reserve Policy (i.e., raising interest rates) works to strengthen the dollar. The easing of rates is associated with weakening the currency. Relative rates vs. other central banks are also relevant.
- Economic Factors: The dollar tends to strengthen when there is a strong, growing US economy or when there is a global recession. In the latter, money has historically flowed to the dollar as a safe-haven for foreign assets.
- Relative Growth & Deficits: Dollar weakness is more likely when US fiscal deficits are relatively high or when US economic growth lags other developed economies.
The Great Recession of 2008 was a turning point from dollar weakness to a long period of dollar strength. Here at home, interest rates were at historically low levels, and economic growth was slower than it had been in other economic recoveries. Against a backdrop of zero-percent rates and anemic growth in many other developed markets, however, the US attracted foreign capital, leading to a persistent strengthening of the currency.
The end of Covid and the reopening of the world in 2021 was a transition period that, we believe, started the next secular downtrend for the dollar. Interest rates rose rapidly as the Fed increased short-term rates 11 times between March 2022 and July 2023. At the same time, our European counterparts were doing the same. Japan eventually followed. Eventually, the move to higher rates has led to the narrowing of interest rate differentials between the US and our global counterparts.
We believe that the downtrend can persist for three reasons:
- U.S. economic data has been softening, leading to a less aggressive Fed. Recent job reports have been weak. More announced layoffs have been happening. Recently, President Trump formally announced the nomination of Kevin Warsh to succeed Jerome Powell as the Chair of the Federal Reserve Board when his term ends in May. Warsh has been advocating for a cut in the federal funds rate to what he perceives as “neutral” level, which would equate to 3.00%, or ½ percent lower than the current rate.¹
- The interest rate differentials between the US and our global counterparts have been narrowing. This has been driven by anticipated Federal Reserve rate cuts, rising Japanese yields, and some emerging markets slowing their rate cuts as economic fundamentals strengthen, yield-driven incentives to hold US assets diminish.²
- Capital flows have been rotating toward non-U.S. assets. One reason for this could be the simple rebalancing of holdings by foreign holders. This makes sense to us, given the US stock market’s 10+ years of outperformance and a high concentration in a few of the largest technology stocks. The other factor is geopolitical uncertainty, heightened by the US tariff policy and the reaction to the Russian invasion of Ukraine.
Chart #1: www.stockcharts.com Data 01/02/2001 – 02/04/2026 as of 02/04/2026. An index is not managed and not available for direct investment. MA 13 = 13-week moving average MA 40= 40-week
Overseas Markets Shine
In our November 2025 letter, we discussed that International Stock Market leadership was a result of the weak dollar, European earnings recovery, and reasonable valuations. At that time, we were encouraged but still skeptical that the leadership could continue into 2026.
The continued outperformance of international equities is notable. Markets across Europe, Japan, and key emerging economies have continued to deliver strong relative returns. This reflects both improving fundamentals abroad and a meaningful shift in global capital flows. After more than a decade in which U.S. stocks dominated nearly every performance comparison, the valuation gap between the U.S. and the rest of the world has widened to levels that, we believe, have become difficult for investors to ignore. Many overseas markets continue to trade at significant discounts relative to U.S. equities, offering a compelling combination of lower valuations and improving earnings momentum.
At the same time, cyclical sectors—industrials, financials, materials—represent a larger share of international indices than they do in the U.S. These areas have been early beneficiaries of a broadening global recovery and the weakening U.S. dollar, which enhances the competitiveness and profitability of companies abroad. When you combine attractive valuations, improving economic conditions, and favorable currency dynamics, the result is a compelling setup for continued international leadership.
The Reawakening of Small and Mid-Cap Stocks
Another important shift we think investors need to take notice of is the renewed strength in small‑ and mid‑cap stocks. After years of lagging behind the mega‑cap names that dominated the post‑pandemic cycle, these segments are finally showing signs of life. Outperformance, in our opinion, is not a short-term blip, but a reaction to improving fundamentals, more favorable financial conditions, and a broadening of market leadership.
We believe the key to this story is valuations. Small and mid‑caps entered this year trading at some of the steepest discounts relative to large‑caps in decades. With interest‑rate pressures likely to ease and earnings expectations appearing to stabilize, the long‑term appeal makes sense to us. Add in the possibility of increased M&A activity – historically a tailwind when valuations are depressed – and the setup becomes even more compelling.
If this trend continues over the next few years, we believe it will mark a meaningful shift in market dynamics. Broader participation across market caps is typically a sign of a healthier, more durable bull market. And for long‑term investors, small‑ and mid‑caps can provide diversification, growth potential, and exposure to parts of the economy that often lead during early and mid‑cycle expansions.
Final Thoughts: What do we believe you should be doing?
While there is never a guarantee in the stock market, the shifts underway feel more substantive than the typical early‑year repositioning. A weakening U.S. dollar, the sustained leadership of international markets, and the reawakening of small‑ and mid‑cap stocks all point toward a market that is broadening rather than narrowing. That broadening is healthy. It suggests that investors are beginning to look beyond the handful of mega‑cap names that have dominated returns for years and are rediscovering opportunities across geographies, sectors, and company sizes.
At the same time, we remain mindful of the lessons embedded in Sir John Templeton’s famous warning. Most of the time, markets rhyme more than they reinvent themselves. But every so often, underlying forces truly do reshape the economic and investment landscape. We believe artificial intelligence has the potential to join that short list of transformational forces.
Importantly, we do not see AI as a story limited to the small group of companies that have benefited so far. In our view, AI will increasingly influence a broad swath of publicly traded businesses – enhancing productivity, reshaping cost structures, accelerating innovation, and creating new competitive dynamics across industries. This is a topic we plan on discussing in future commentaries.
For now, the key takeaway is this: while it is too early to declare a definitive “this time is different” moment, the combination of shifting market leadership and what appears to be the early stage of a major technological transformation suggests that investors should stay open‑minded. Periods like this can be challenging to navigate in real time. They also tend to be rich with opportunities for those who remain disciplined, diversified, and focused on long‑term fundamentals.
As always, we’re here to help you navigate the path ahead—whether it’s updating your plan, rebalancing your portfolio, or thinking through the next chapter of your financial journey. If you have questions or want to explore your options, don’t hesitate to reach out.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
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MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
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Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner
Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner
Jon.Soden@wfafinet.com
Cassandra Queen, CFP®,ChFC®, Senior Wealth Planner
Cassandra.Queen@wfafinet.com
Susan C Schupp, MBA, Senior Wealth Planner
Susan.Shupp@wfafinet.com