U.S. Small-Cap Stocks Surge 20% YTD, Posting Best Performance in Over 20 Years
Taylor Wilson
The Russell 2000 has gained 20% year-to-date, on track for its best annual performance since 2003; the S&P 500 is up roughly 10%, while the Magnificent Seven have risen less than 3%. This means → capital is rotating out of a handful of mega-cap tech names into a much broader set of smaller companies.
Big tech stalling — why are small-caps taking over?
The S&P 500 is up about 10% this year, the Magnificent Seven less than 3%, yet the Russell 2000 has climbed 20% — the widest gap in years.
JPMorgan Private Bank strategist Kriti Gupta says investors waited years for the market to broaden, only to be disappointed. "But the baton is being passed," she says — returns no longer depend on a few winners.
This reflects a drop in the marginal appeal of highly valued mega-cap tech, pushing capital toward cheaper, more diversified names.
How is the AI "industrial super-cycle" lifting smaller companies?
Société Générale US equity strategy head Manish Kabra attributes the rally to an American AI "industrial super-cycle."
Amazon, Meta, Microsoft, and Alphabet are projected to spend a combined $725 billion on AI infrastructure this year, up roughly 77% year-on-year.
In plain terms = the giants are pouring money into data centers; orders for equipment, components, and construction flow to legions of small suppliers — directly boosting small-cap tech and industrial stocks.
What role did tax reform play?
The One Big Beautiful Bill Act, signed by President Trump, took effect last summer; tax refunds were distributed to citizens this spring, and small businesses benefited from corporate-tax cuts and accelerated depreciation.
Kabra is blunt: "Without this bill, no small-cap sector would have delivered double-digit returns."
Analysts note the bill helped the US economy stay robust even as an effective blockade of the Strait of Hormuz pushed energy prices sharply higher — tax refunds partly offset pressure on consumer spending.
Which stocks have surged the most?
Semiconductor fluid-delivery component makers Ichor Holdings and Ultra Clean Holdings have each more than quadrupled this year; cloud-services provider Rackspace Technology is up 450%.
Healthcare services firm agilon health leads the small-cap leaderboard with a 567% gain.
This means → the AI supply chain's beneficiaries extend far beyond chips themselves — from fluid components to cloud services to health tech, capital is spreading link by link.
Are small-cap valuations actually expensive?
The Russell 2000 trades at roughly 29× earnings — P/E measures how much you pay for each dollar of profit — above the S&P 500's 20×. At first glance, that looks pricey.
But the figure is inflated by a large share of low-earning or unprofitable growth companies. Strip those out via the S&P 600 small-cap index, and the forward P/E drops to about 16× — below the large-cap benchmark.
State Street Global Advisors' Dane Smith says large-caps carry "high valuations plus concentration risk," while small-caps offer a degree of risk mitigation.
Can this rally last?
Some analysts warn the strong performance is not purely healthy broadening — sharp price surges in loss-making stocks are a significant driver too.
This reflects excessive optimism about future earnings among investors.
In plain terms = small-caps' "report card" is largely propped up by expectations for now; whether they can convert AI supply-chain tailwinds into real earnings is the true test of this rally's staying power.
Content is for reference only, not financial advice.