Market's New Main Character: Small Caps Lead as AI Chip Search Volume Plateaus

The market's main character has just changed. After a prolonged focus on mega-cap tech and AI chips, capital is now flowing toward smaller companies. This shift is clear in both price action and search interest.

The Russell 2000 is the standout performer, riding an 11-day winning streak that is the longest since 2008. It closed the week at a record high, finishing with a 0.1% gain. That's a stark contrast to the broader market, where the S&P 500 dipped 0.4% for the week. This divergence shows where investor attention and capital are concentrating.

The trend is also visible in online search volume. Interest in terms like "small caps" and "Russell 2000" has surged, indicating growing focus on this segment. This isn't just a price move; it's a shift in the market's narrative. As one analyst noted, money is moving out of some heavyweight tech names into more undervalued areas such as small caps, materials and industrial stocks.

The bottom line is that the search for the next big winner has pivoted. While AI chip stocks like Micron and the iShares Semiconductor ETF (SOXX) are still rallying, the broader market is looking elsewhere for value. The Russell 2000's streak and record close are the tangible results of this new capital flow, making small caps the trending topic for now.

The Cooling Trend: AI Chips Lose Viral Sentiment

The AI chip rally is still moving, but its momentum is clearly slowing. While the iShares Semiconductor ETF (SOXX) gained 2% on Friday, its near 12% rally so far this year has handily beaten the Nasdaq 100's 1.2% rise. This shows persistent investor faith in the sector's fundamentals. Yet, the context reveals a market that is shifting its focus.

Money is rotating out of heavyweight tech into other areas. The same report notes that faith in AI-driven chip demand is coexisting with a flow of capital out of some heavyweight tech names into more undervalued areas such as small caps, materials and industrial stocks. This rotation is the key signal. It means the AI chip story, while not dead, is no longer the only headline driving the market's attention.

The most telling sign of waning viral sentiment is in search volume. After a steep climb, interest in terms like "AI chips" and "semiconductor stocks" has plateaued. This plateauing signals that the initial wave of speculative excitement has crested. The sector is now in a phase of steady, fundamental-driven performance rather than explosive, trend-driven growth.

The bottom line is that AI chips remain a solid performer, but they are losing their status as the market's main character. With capital flowing to small caps and search interest cooling, the sector's role has shifted from catalyst to beneficiary. It's a setup where the story is still good, but the market's next big bet is elsewhere.

The Breakout Leaders: Micron and Western Digital

While the market's attention is shifting to small caps, the memory chip sector is still the main character for those chasing a headline-driven rally. On Friday, the breakout stocks were clear: Micron (MU.O) up 6.4% in premarket trading and Western Digital (WDC.O) up 4.9% led the charge. These moves weren't isolated; they built on the sector's searing rallies in 2025, showing that AI-driven chip demand still carries strong headline risk and can spark explosive moves.

The search volume confirms these are the current breakout stocks. When prices pop like this, interest spikes. The fact that Micron and Western Digital are seeing such sharp premarket gains is likely driving a surge in online searches for their names, making them the focal point of the semiconductor news cycle this week.

Viewed another way, this is the sector's final act before the broader market's rotation takes hold. The memory chipmakers are still the beneficiaries of the AI story, but their viral sentiment is cooling as capital flows elsewhere. For now, however, they remain the leaders, proving that even in a shifting market, the strongest momentum often comes from a few clear breakout names.

Catalysts and Risks: What's Next for the Market's Main Character

The Russell 2000's winning streak is the market's current headline, but its next move hinges on a few key catalysts and risks. The setup is clear: the small-cap rally has momentum, but it faces tests from earnings, policy shifts, and broader economic data.

The immediate catalyst is the upcoming earnings season, which kicks off next week with reports from Netflix, United Airlines, and Johnson & Johnson. For the small-cap leadership to continue, the forward guidance from these companies-especially their outlook for 2026-will be critical. As Citi's Drew Pettit notes, investors will be watching for commentary on the 2026 EPS trajectory and beyond. Strong, optimistic guidance could reinforce the rotation into undervalued areas. Conversely, any hint of caution or a pullback in 2026 expectations could quickly shift sentiment back toward safety and stability, potentially ending the Russell 2000's streak.

At the same time, watch for any shift in Federal Reserve policy signals. Recent market moves have shown sensitivity to speculation about the Fed chair selection. The market's reaction to odds favoring different contenders, like former Fed governor Kevin Warsh, has been a notable source of volatility. Any concrete signals from the Fed on interest rates or policy direction in the coming weeks will be a major influence, as the 2-year Treasury yield remains a key barometer of rate expectations.

The main risk to the small-cap rally is a broader market pullback if economic data disappoints. While the Russell 2000 is outperforming, it is still part of the overall market. Weak retail sales or industrial production figures could trigger a flight to quality, pulling down smaller stocks along with the broader indexes. The market's recent struggle near the $7,000 level for the S&P 500 shows how fragile sentiment can be, especially with yields moving higher.

The bottom line is that the small-cap story is now the main character, but its script is being written by earnings, Fed chatter, and economic data. The breakout stocks in the semiconductor sector may have cooled, but the market's next big bet will be determined by these fundamental and policy catalysts.