Smaller companies are increasing their weight on Wall Street.
The Russell 2000, which tracks stocks of smaller companies, climbed nearly 22% in the first six months of the year. That’s the best first half since 1991, outperforming the Nasdaq Composite by nearly 9 percentage points – its biggest outperformance over that period since 2006. At one point last week, the index hit four consecutive record closes.
It’s an often overlooked bright spot in a market that has been dominated for years by the trillion-dollar giants of the artificial-intelligence business. Some investors are taking this as a sign that the recent surge in stock prices, which has been mostly confined to big chip companies like Intel or Micron Technology, is finally spreading to other corners of the market.
“Investors are stepping back and saying, ‘Where can the next phase of alpha come from?'” said Joshua Schachter, chief investment officer at Easterly Snow, referring to the trading term for outperforming market benchmarks. “The market was lacking many interesting ideas with big valuations.”
That’s why Scheckter has made some profits recently, selling semiconductor stocks and other AI plays before rotating those funds into companies in the healthcare, industrial and consumer-discretionary sectors.
Chip manufacturer? “They’re great companies,” he said. “But stocks are too expensive.”
The prospect that the Federal Reserve will lower borrowing costs in 2026 helped small market-capitalization companies get a strong start to the year, before the war with Iran reversed those bets. Now, small-caps are benefiting from a resilient economy, which looks set to improve in the coming months.
After the US-Iran peace agreement, inflationary pressure has reduced, leading to a sharp decline in the price of oil. Thursday’s jobs report showed a softening in the labor market, raising hopes the Fed will hold off on raising rates later this year, but not so much as to raise fears of slower growth.
This changing approach is particularly beneficial to small-cap companies, which earn most of their money domestically and have less access to capital markets than multinationals – often borrowing using rates adjusted for the Fed’s trade-offs.
Add to this the fact that American companies are making a lot of money, and the windfall is not limited to companies like Microsoft or Nvidia. Among the biggest gainers in the S&P Small Cap 600 index last quarter: buy now, pay later platform Sezzle and restaurant chain Cracker Barrel.
Asked about the outlook in the first-quarter earnings call, Sezzle Chief Executive Charlie Youakim said, “When we look at the numbers it looks like our customers are absolutely healthy for us.”
Francis Gannon, managing director of Royce Investment Partners, which invests primarily in small-caps, said analysts are projecting 54% earnings growth for companies in the Russell 2000 in 2026. That’s more than double the expected rate for the Russell 1000, which tracks large-cap stocks.
“The small-cap earnings story is very strong and this is just the beginning,” Gannon said. “We have to go for a little run.”
Small-caps can be more volatile than shares of larger, more established companies and often lag behind shares of larger companies. And the Russell 2000 still includes chip stocks, meaning it’s also been boosted by the same frenetic rally that has driven parabolic gains in chip names like Sandisk and Dell Technologies. This means small-cap indexes could be subject to the same swings in AI sentiment that have plagued big tech companies in recent weeks.
Other top performers in the S&P Small Cap 600 over the past quarter include semiconductor company MaxLinear, which is up more than 600%. Winners also included chip maker Theme Intertechnology and AI-infrastructure business Penguin Solutions, each whose stock price more than doubled in the second quarter.
“Some sectors are performing better than others,” said Philippe Blancato, chief market strategist at OSAC. “It’s actually a small part of the index that has driven these returns.”
Small-caps still make up a relatively small share of the market compared to their supersize competitors. The combined market value of all the companies in the S&P Small Cap 600 is $1.83 trillion – or about the same size as Broadcom.
For the Russell 2000, there may be an additional challenge: The index recently underwent its annual rebalancing, graduating some of the top-performing members to the large-cap Russell 1000.
But as the red-hot chip-stock rally intensifies, even the biggest bulls are wondering how long the latest phase of the AI mania can last and where the money might go when it dries up. Even switching a slice of those investments to smaller stocks would make a big difference, said Keith Lerner, chief investment officer at Truist Advisory Services.
“It doesn’t take much,” he said. “A little bit of good news goes a long way for small-caps.”
Write to Hannah Erin Lang at hannaherin.lang@wsj.com and Shraddha Dinesh at shraddha.dinesh@wsj.com.