The Russell 2000 Is Having Its Best Year in 23 Years. Here's Why Small-Caps Are Winning Again
The Russell 2000 Is Having Its Best Year in 23 Years. Here's Why Small-Caps Are Winning Again.
The Russell 2000 has surged 20% in 2026, its best performance since 2003, as AI spending ripples beyond mega-cap tech into small caps.
Unprofitable Russell 2000 companies have surged 154% since mid-2025, dwarfing profitable peers' 34% gain as investors bet on AI exposure over current earnings.
AI exposure alone doesn't guarantee success. Small caps must convert infrastructure positioning into revenue growth and profitability to justify stretched valuations.
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The stock market has spent much of the AI boom rewarding companies that can turn artificial intelligence spending into revenue, profits, and cash flow. But in 2026, investors have expanded the list of winners. The rally has moved beyond mega-cap technology companies and into smaller companies positioned to benefit from the massive buildout of AI infrastructure.
That shift has pushed small-cap stocks into a leadership role. The Russell 2000 index has gained 20% so far in 2026, putting it on pace for its strongest annual performance since 2003. Meanwhile, the S&P 500 has climbed 11%, and the Magnificent 7 group of mega-cap AI leaders has advanced just 4%.
The surprising part is not simply that small caps are winning. It is which small caps are winning.
Data from HSBC shows the current small-cap rally has turned traditional investing logic on its head.
Historically, profitable companies tend to outperform weaker businesses over time because earnings provide a foundation for valuation. But since mid-2025, the opposite has happened inside the Russell 2000.
In other words, unprofitable companies have outperformed profitable peers by a wide margin.
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That does not mean investors have suddenly stopped caring about earnings. Instead, the market is placing a premium on companies that could become important suppliers, service providers, or infrastructure builders in the AI economy.
To put that into context, the biggest AI beneficiaries are not limited to companies designing chips or building large language models. The AI expansion requires data centers, power infrastructure, networking equipment, cooling systems, and specialized software. Many of those opportunities sit outside the traditional technology giants.
The strongest-performing small-cap stocks have been technology and infrastructure companies connected to AI spending. The reason is simple: AI requires physical expansion.
Companies building the tools and infrastructure needed to support rising AI workloads are seeing investor interest even when current earnings remain negative. The market is effectively betting that today's losses represent investment ahead of future demand.
Coincidentally, this resembles earlier technology cycles, where investors often valued future market opportunities before companies produced consistent profits. The difference today is the scale of spending.
