Which Way Will the Bull Turn Next?
Editor’s note: This Wednesday (May 27 at 4:30 PM ET), Jim Pearce goes live to share the full scorecard on his 2026 Comeback Stocks — every pick he made, with the actual return. Including the ones that haven’t worked yet. He’ll also reveal three new picks for the second half of the year. One of them is free to everyone on the call. Reserve your seat →
I don’t know when the war in Iran will end, but I have a good idea of what is likely to happen when it does. I expect mid cap stocks to rally strongly once the Strait of Hormuz reopens for good, while large cap stocks will give back some of their recent gains.
As is often the case when it comes to the stock market, in the end it boils down to simple math. A lot of money has gone into large cap stocks since it became apparent that an end to the war would not be as soon or easy as initially projected.
On March 31, one month after the start of the war in Iran, the NASDAQ 100 Index closed near 23,740. As its name implies, this index consists of the 100 most valuable companies that trade on the NASDAQ. Most of them are in the tech sector, with NVIDIA (NVDA), Apple (AAPL), and Microsoft (MSFT) being its top three holdings.
On May 15, the cap weighted version of the NASDAQ 100 Index was at 29,125. That’s a gain of more than 22 percent in just six weeks. However, on an equal weight basis, the index was up less than 14 percent over the same span.
Those are very good results no matter which way you look at it. Now, let’s apply the same math to the S&P 500 Index. It consists of the 500 most valuable stocks trading an all U.S. exchanges, including the NASDAQ and NYSE.
Over that same six-week period, the cap weighted version of the S&P 500 Index gained a little less than 14 percent, nearly identical to the equal weight performance of the NASDAQ 100 Index. The equal weight version of the S&P 500 was up just 5 percent over the same span.
Going Stag
You can see where this math is going. The further removed we get from the same small number of giant tech stocks that dominate the performance of the major stock market indexes, the worse the numbers get.
That’s because Wall Street is becoming increasingly nervous that high oil prices may trigger a recession at the same time they are contributing to rising inflation. Whenever the dreaded ‘s’ word (stagflation) starts getting bandied about, portfolio managers seek shelter in the safety of mega cap tech stocks.
That makes sense, but only to a point. Over the same six-week period described above, the small-cap Russell 2000 Index was up almost 12 percent. That is more than double the performance of the equal weight version of the S&P 500 Index that consists of companies that are all more valuable than any company in the Russell 2000 Index.
If portfolio managers on Wall Street really believe that stagflation is on the way, I doubt they would be loading up on companies that are least able to thrive in that environment. Historically, small cap stocks tend to outperform large caps in the early stages of economic expansion, which is clearly not the case.
In other words, the stock market behavior over the past six weeks does not appear to be strategic in nature. If it were, then small cap stocks should have lost ground during that time.
Herd Instinct
Instead, what appears to be going on is a purely tactical approach to manipulating relative performance. Portfolio managers are compensated many ways, including how they perform relative to their peer group. As long as all of them make the same moves at the same time, none of them should be at risk of losing their jobs.
For that reason, the herd instinct is very strong on Wall Street. And right now, the herd is moving into mega cap tech stocks. That probably won’t change until the Strait of Hormuz reopens and the risk of stagflation is reduced.
As an investor, you can profit from that herd mentality by anticipating its next move. If you wait until that shift in sentiment is well underway, you will miss out on much of its upside potential.
That is why I added five small cap and mid cap stocks to the Personal Finance Growth Portfolio in April. As I said then, “The rotation out of mega cap tech stocks into small and mid-cap stocks that began last fall will resume as soon as there is a definitive resolution to the current conflict.”
So far, I have made money on three of those trades and lost money on the other two. That doesn’t really matter to me since the war in Iran is not over. More importantly, I wanted to open those positions at attractive valuations while I still could.
Of course, if the Strait of Hormuz remains closed for several more months, then even large cap stocks will suffer. At some point, the rising threat of stagflation will induce a correction that takes down stocks of all sizes.
I don’t expect that to happen. If I did, then I would not have just added new holdings to my portfolio. I believe Wall Street’s next big move will be into the same mid cap stocks that it has been shunning over the past six weeks.
The conviction Jim laid out here — that the herd’s next big move will be away from mega-cap tech and into the smaller companies Wall Street has been shunning — is the same thesis he’s been building inside the Personal Finance Growth Portfolio since April. If you want to see the full picture, he’s going live this Wednesday, May 27 at 4:30 PM ET to walk through the complete 2026 scorecard: every position, every return, winners and misses alike. Then he’s naming three new picks for the second half of the year. The first one, he’s giving away free just for being on the call.