Asian Stocks to Rise Before Payrolls, Oil Jumps: Markets Wrap

Small-cap stocks have led early gains in 2026, with the Russell 2000 Index up nearly 6.2% in the first week of the year. This performance outpaced the S&P 500 and Nasdaq, which have seen more modest gains or flat movements. The rally is attributed to a combination of Federal Reserve easing and a shift in investor focus from tech-heavy indices to undervalued small-cap companies according to market analysis.

Defense stocks surged on Thursday after President Donald Trump proposed increasing the U.S. military budget to $1.5 trillion in 2027. Companies like Lockheed Martin and Northrop Grumman saw significant gains, reversing losses from the previous day when Trump announced restrictions on dividends and buybacks. The market response was immediate, with shares climbing as investors anticipated increased spending and production opportunities.

In Asia, investor concerns have been raised by Indonesia's fiscal deficit, which reached 2.92% of GDP in 2025—close to the legal limit. This high deficit, fueled by declining tax revenue and increased government spending, has led to a cautious market reaction. The rupiah weakened slightly after the announcement, and bond yields remained stable, signaling uncertainty over fiscal sustainability.

Why Did This Happen?

The small-cap rally is largely driven by the Federal Reserve's recent rate cuts, which have reduced borrowing costs for smaller companies. This has enabled a shift in capital toward the Russell 2000, as investors seek growth in undervalued sectors. Additionally, the geopolitical developments in Venezuela have further redirected investment toward industrials and energy infrastructure according to market analysis.

The defense sector's sharp rebound came after a brief slump following Trump's announcement that companies must prioritize military production over shareholder returns. Investors appear to have discounted this policy in favor of the anticipated spending boost. The market is now pricing in long-term contracts and increased demand for military equipment.

How Did Markets React?

U.S. stock futures moved lower on Thursday, with investors preparing for the upcoming nonfarm payrolls report. However, defense stocks bucked the trend and rose sharply after Trump's budget proposal. This divergence highlights the sector-specific nature of the market's reaction, with investors focusing on tangible growth opportunities in defense and industrials.

Asian markets remain watchful of Indonesia's fiscal outlook. The government's failure to meet revenue targets and the rising deficit have led to concerns over inflation and currency stability. While no immediate crisis is evident, analysts are monitoring for signs of policy adjustments or economic slowdown according to financial reports.

What Are Analysts Watching Next?

The Federal Reserve's upcoming meetings will be key for the small-cap rally to continue. If inflation remains elevated, the current favorable conditions for small caps could erode. Analysts are also watching for earnings reports from regional banks and industrial firms to gauge whether the recent valuation gains are being translated into real earnings according to market analysis.

Investors in defense stocks are assessing the feasibility of Trump's proposed budget and its implications for long-term contracts. While the immediate market response was positive, the sustainability of this rally will depend on whether the budget is passed and how quickly production increases are implemented according to business insights.

In Asia, the focus remains on Indonesia's fiscal and economic policies. The government is under pressure to balance growth initiatives with fiscal responsibility. Analysts are watching for any changes in the budget or monetary policy that could affect market confidence and capital flows according to financial analysis.