In her January 2026 Market Snapshot1, Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, offers a macro-literate, data-rich, and thematically layered assessment of how markets evolved in 2025—and what investors should be watching as the new year unfolds.
From the resurgence of international equities to the broadening of market leadership and a cautionary tale about mega-cap distortions, Sonders unpacks the shifting terrain for diversified investors with her trademark balance of nuance and directness.
Below is a detailed breakdown of Sonders’ key observations, supported by verbatim quotes and contextual framing across five major market themes.
1. International Equities Stage a Comeback
After years of playing second fiddle to U.S. mega-caps, both developed international (MSCI EAFE) and emerging markets equities posted standout performance in 2025.
“After several years of persistent underperformance versus U.S. equities, both the developed international stocks … and emerging markets equities decisively outpaced the S&P 500 and NASDAQ in 2025.”
The strength wasn’t a flash in the pan. It persisted into early 2026:
“That trend has continued over the trailing one-month period as well.”
Perhaps most notably, the two-year return numbers now show clear momentum for non-U.S. markets, narrowing the yawning performance gap from the pandemic-era mega-cap boom:
“This relative strength has helped close part of the performance gap that had widened significantly during the post pandemic mega-cap-driven rally in the United States market.”
Takeaway: The “U.S.-only” trade may be losing steam. Global diversification is no longer dead money—it’s delivering.
2. Small Caps and the Rise of Cyclical Breadth
The U.S. market story in 2025 wasn’t about a collapse in large caps—it was about leadership becoming more distributed. Small caps and small-cap growth stocks reasserted themselves.
“Small caps have also taken on a leadership role, especially small cap growth stocks.”
But Sonders pushes back on the idea that this marks a reversal of dominance. Instead, she sees cyclicality and diversity returning to market dynamics:
“The overarching lesson … is not that U.S. large-cap leadership has vanished, but rather that leadership has become more cyclical, more diverse, and less one-directional than it was during the height of the mega-cap surge.”
3. Equal-Weight Indexes: The Pulse of Market Breadth
If 2025 had a structural narrative, it was the re-emergence of market breadth—and Sonders points to the outperformance of equal-weighted indexes as proof.
“Performance leadership started to shift away from a narrow set of very large companies toward the so-called average stock.”
The equal-weighted S&P 500 outpaced the cap-weighted version. Ditto for the equal-weighted Russell 2000. This is no small technicality—it reflects a healthier, more participatory market:
“When equal-weight outperforms cap-weight, it suggests that returns are being shared more evenly across companies, rather than concentrated in a handful of giants.”
But Sonders doesn’t just anchor on relative comparisons. She calls attention to the absolute performance of equal-weight indexes, framing them as a signal of deeper strength:
“Its steady advance through 2025 confirms that participation has broadened, lending greater durability to the market’s advance.”
Takeaway: Breadth is back. And for advisors, this could mark a shift in how they construct exposure to U.S. equities—especially in passive portfolios.
4. Mega-Caps: The Distortion Between Contribution and Performance
Sonders turns a sharp lens on index construction math, using names like Nvidia, Apple, and Amazon to highlight how cap size skews perception.
“The past year was a textbook illustration of the difference between a stock’s contribution to index returns and its actual price performance.”
Case in point: Nvidia.
“In 2025, it was the single largest contributor to the S&P 500’s overall returns, but that owed to its enormous index weight.”
Strip out the size, and its price rank was a pedestrian 75th among S&P 500 stocks. Apple? Even worse.
“Despite ranking eighth in terms of contribution to index returns, its performance rank sat far lower, at 229th.”
This divergence has continued into 2026. Amazon leads in index contribution, yet:
“There are more than 120 stocks in the index with better price performance.”
Sonders’ conclusion is blunt:
“These discrepancies underscore how a handful of very large companies can dominate headline index returns by virtue of the multiplier of their cap sizes, even when a substantial number of stocks are actually performing just as well or better on a price performance basis.”
Takeaway: The illusion of market strength, driven by cap-weighted indexes, is a structural risk. Equal-weight—and active management—may serve as useful correctives.
5. Cyclicals vs. Defensives: A Barometer of Economic Confidence
Cyclicals staged a powerful rally in 2025, especially after April’s tariff-driven volatility.
“Since last April’s lows … cyclical sectors have surged relative to defensive sectors, pushing that ratio to new highs.”
This suggests investors are pricing in growth optimism:
“Cyclicals tend to benefit from improving growth expectations, increased risk appetite.”
But Sonders tempers this bullish signal with a critical insight: part of the outperformance is due to weakness in defensives, not just strength in cyclicals.
“Over the past couple of years, traditionally defensive sectors like consumer staples, healthcare, utilities, have delivered notably poor relative performance.”
In fact, the combined market cap weight of these sectors hit an all-time low.
“The last time defensive sectors’ weight in the index compressed to similar levels … was in the late 1990s, just before the technology bubble burst.”
While she’s careful not to overdraw the comparison:
“Today’s environment differs in many important respects.”
… she still warns of leadership skew and the risk of thematic crowding.
Takeaway: Don’t mistake sector rotation for structural resilience. Advisors may need to look beyond headlines and reassess defensive ballast in client portfolios.
Final Word: Diversification Revisited—Now It's Working
Sonders ends her January snapshot on a philosophical note—anchored in years of having to defend diversification in a world where cap-weighted U.S. large caps seemed unstoppable.
“We always espouse diversification both across and within asset classes, and frankly, there are times when recommending diversification meant having to regularly say we’re sorry.”
Now, with global stocks outperforming, equal weight catching up, and small caps rallying, she adds:
“More recently, though, recommending diversification has meant we’re able to say you’re welcome.”
Key Takeaways for Advisors and Investors
| Theme | Insight |
|---|---|
| Global Equities | International and emerging markets are decisively outperforming, suggesting global leadership shift. |
| Market Breadth | Equal-weight indexes outperforming cap-weighted peers reflects healthier participation. |
| Mega-Cap Distortion | Index returns remain skewed by large-cap weights despite mediocre price performance. |
| Cyclicals vs. Defensives | Cyclicals’ outperformance signals economic optimism, but defensives’ collapse is a caution flag. |
| Diversification Works Again | Advisors can now point to real return benefits from diversification, both global and domestic. |
Bottom Line
In a world still wrestling with concentration risk, headline distortions, and shifting macro winds, Liz Ann Sonders delivers a clear, grounded message: real diversification is finally being rewarded.
Her 2025 market review and 2026 outlook invite investors and advisors alike to look beyond the index, reassess sector and style exposures, and embrace a broader, more cyclical—and potentially more durable—market regime.
Footnote:
1 Liz Ann Sonders "Market Snapshot | January 2026." Charles Schwab, 14 Jan. 2026.
