S&P 500 Outpaces Small Caps Again as Liquidity Squeeze Hits Risk Assets

If you’re still holding out hope for a small-cap renaissance, you might want to check your calendar. It’s not 2013, and the S&P 500 is once again making small caps look like a bad habit you just can’t quit. The latest round of market data shows large caps holding steady while risk assets everywhere get squeezed by a relentless Treasury issuance machine. The message from the tape is clear: size matters, and right now, bigger is still better.

According to Seeking Alpha (2026-02-01), small caps have failed to add alpha for years, and the odds are more stacked against them than ever. The S&P 500, meanwhile, continues to attract capital like a black hole. The rotation that everyone keeps waiting for—out of mega-cap tech and into the neglected corners of the market—just isn’t happening. Instead, liquidity is being hoarded by the biggest, most liquid names, while everything else gets left behind.

It’s not just a US story. Global risk assets are under pressure as Treasury settlements and a rising Treasury General Account (TGA) drain $64.3 billion from the system (Seeking Alpha, 2026-02-01). The liquidity tide that lifted all boats in 2024 and 2025 has gone out, and now we’re seeing who’s been swimming naked. Spoiler: it’s the small caps, the high-beta plays, and anything with a balance sheet that can’t survive a quarter without cheap money.

The S&P 500’s resilience is as much about flows as it is about fundamentals. ETFs like XLF (Financials) and XLV (Health Care) are flat, but that’s a win in this environment. The fact that XLF is holding at $53.46 and XLV at $154.8 with zero movement is a testament to the market’s current risk aversion. Investors are parking capital in the safest corners of the equity market, waiting for the next shoe to drop.

Meanwhile, the “stock whisper” crowd is still hunting for the next big thing, but the real action is in the names everyone already owns. Benzinga’s index of “secretly monitored” stocks is just another sign that alpha is getting harder to find. When everyone’s chasing the same trade, the only winners are the market makers.

The macro backdrop is doing small caps no favors. With Treasury issuance ramping up and the Fed in no hurry to cut rates, liquidity is being rationed. Every dollar that goes into the TGA is a dollar that doesn’t find its way into risk assets. The result is a market that rewards size, stability, and cash flow above all else.

Historically, small caps have outperformed during periods of economic recovery and easy money. But this cycle is different. The post-pandemic boom is over, inflation is sticky, and the policy tailwinds that once favored risk-taking have turned into headwinds. Until the liquidity picture improves, expect the S&P 500 to keep leaving small caps in the dust.

Strykr Watch

Technically, the S&P 500 is consolidating near all-time highs, with resistance just overhead. The lack of movement in sector ETFs like XLF and XLV signals a market in wait-and-see mode. Support for XLF is at $52.50, with resistance at $54.00. For XLV, watch $152.00 as support and $157.00 as resistance. The risk/reward for chasing breakouts here is poor, but dips are being bought aggressively in the large-cap space.

Small caps, by contrast, are stuck below key moving averages, with no sign of relative strength. The Russell 2000 continues to lag, and breadth remains weak. Until you see a decisive reversal in the liquidity trend, there’s little reason to rotate out of large caps.

Volatility remains subdued in the major indices, but under the surface, single-stock dispersion is picking up. That’s a sign that traders are getting more selective, and that the easy beta trades are over. If you’re playing for alpha, you need to be nimble and willing to fade consensus.

Strykr Take

This is not the time to get cute with small caps. The market is rewarding size, liquidity, and quality. Stay with what’s working, and don’t try to catch falling knives in the riskier corners of the market. When the liquidity picture changes, you’ll know. Until then, keep it boring—and profitable.