Small-cap investors are enjoying their moment in the sun. The Russell 2000 index extended its winning streak against the S&P 500 to 10 consecutive sessions on Thursday, matching a record that has stood since 1990—more than three and a half decades ago.

The streak represents a dramatic reversal from recent years, when mega-cap technology stocks dominated market returns and left smaller companies far behind. With the Russell 2000 up more than 8% in 2026 compared to the S&P 500's 1.5% gain, investors are asking whether this marks the beginning of a sustained rotation.

What's Driving the Small-Cap Surge

Several factors have converged to fuel the small-cap rally:

Interest rate expectations: Smaller companies typically carry more debt relative to their size, making them more sensitive to interest rate changes. With investors now expecting the Federal Reserve to cut rates starting in June, small caps are benefiting from the prospect of lower borrowing costs.

Domestic focus: Russell 2000 companies generate a larger share of their revenue domestically compared to multinational giants in the S&P 500. This makes them potential beneficiaries of the Trump administration's "America First" policies, even as tariff uncertainty weighs on companies with significant international exposure.

Valuation gap: Small caps entered 2026 trading at historically low valuations relative to large caps. The price-to-earnings ratio gap between the Russell 2000 and S&P 500 had widened to its largest level in decades, creating a compelling value opportunity.

Historical Context

The last time small caps dominated large caps for this long was in the early months of 1990. That streak preceded a period of sustained small-cap outperformance that lasted several years.

"When you see small caps outperforming for this many consecutive sessions, it often signals a broader change in market character. Investors are clearly rotating away from the mega-cap trade that dominated 2024 and 2025."

— Market strategist at a leading investment bank

The current streak is particularly notable given how thoroughly large-cap growth stocks—especially the "Magnificent Seven" tech giants—dominated market returns in recent years. Over 300 S&P 500 stocks actually rose this week even as all seven mega-cap names declined, highlighting the breadth of the current rally.

The Magnificent Seven's Struggle

While small caps soar, the Magnificent Seven have stumbled to start 2026. The group—comprising Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla—has collectively underperformed the broader market in January, a stark reversal from their dominant 2024 and 2025 performances.

Apple in particular has faced headwinds from China sales concerns, while questions about the pace of AI monetization have weighed on the group more broadly. This weakness in market leaders has created space for smaller companies to shine.

What It Means for Investors

For portfolio construction, the small-cap surge carries several implications:

  • Diversification benefits: Investors heavily concentrated in large-cap growth may want to consider broadening their exposure. The current rotation highlights the risks of an overly concentrated portfolio.
  • Active management opportunity: Small-cap markets tend to be less efficient than large-cap markets, potentially creating opportunities for skilled stock pickers.
  • Sector considerations: Financial stocks, which comprise a significant portion of the Russell 2000, have rallied strongly on bank earnings beats this week, contributing to the index's gains.

Sustainability Questions

The key question now is whether the small-cap rally has staying power. Bulls point to attractive valuations, improving economic data, and the prospect of Fed rate cuts as reasons for optimism. Bears counter that small caps remain more vulnerable to economic slowdowns and that the current streak may have created short-term overbought conditions.

With markets closed Monday for Martin Luther King Jr. Day, investors will have time to assess whether to chase the small-cap momentum or wait for a potential pullback. Either way, the Russell 2000's historic streak has put small caps squarely back on investors' radar.