The Russell 2000 surpassed 3,000 for the first time this week, extending a run in which small-cap stocks have outpaced both the S&P 500 and the "Magnificent Seven" in 2026. Cheaper valuations and an improving earnings outlook are fueling the case for small-cap leadership, though RBC Capital Markets' Lori Calvasina warns the trade remains choppy.
Russell 2000 breaks 3,000 as small caps outperform
The S&P 500 and Dow Jones Industrial Average reached record highs this week, but another corner of the market quietly outdid them both. The Russell 2000 touched a record high Wednesday, surpassing the 3,000 level for the first time.
Its 20.7% return has outperformed the S&P 500's 12.8% gain this year, and it has also topped the "Magnificent Seven" stocks year to date. Small caps have benefited from profit-taking in the larger, growthier parts of the market.
Cheaper valuations fuel the case for small-cap leadership
Small caps also look cheaper. The iShares Russell 2000 ETF carries a price-to-earnings multiple of 18x, compared with the SPDR S&P 500 ETF's 27x, according to AlphaSpace data. Amid concerns that the market has grown top-heavy around AI-related names, small caps may be seen as an attractive way to gain exposure to the AI boom.
In a note last week, RBC Capital Markets strategist Lori Calvasina laid out the case for small-cap leadership to grind higher. She cited below-average valuations, a stronger bottom-up earnings growth outlook, and economic tailwinds such as a reacceleration in job growth and manufacturing activity.
Risks could pause the small-cap rally
Still, plenty of risks remain, and Calvasina noted it wouldn't be surprising to see small caps take a pause. The trade has already turned choppy, with the S&P 500 again taking the lead over the Russell in the past month amid market rotations.
Tech valuations have also come down, giving investors a reason to rethink large caps. Small caps' greater sensitivity to interest rates may further restrain the trade, particularly if the Iran conflict begins to weigh on growth, Calvasina said.
Source: Yahoo Finance
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