Russell 2000 hit an all-time high Friday and has now outperformed the S&P 500 for 11 straight days - longest streak since June 2008.
**Whats driving this?**
The thesis is straightforward.. stock prices track earnings growth over time.
Since ChatGPT launched in late 2022, S&P 500 earnings have grown around 27% cumulatively, driven largely by the AI buildout and concentrated in mega-cap tech. Small-cap earnings over that period? Essentially flat.
That equation is now reversing:
* Nasdaq 100 earnings growth is decelerating.. +36.8% in 2024 down to +18% expected in 2025
* Meanwhile earnings growth for the broader market is accelerating
Looking at 2026 expectations per FactSet:
* S&P 500: +15%
* S&P 400 mid-caps: +17%
* S&P 600 small-caps: +19%
* Russell 2000: +60% (includes companies currently unprofitable turning positive)
**Why small caps specifically?**
Small-cap strength historically signals investor confidence in the domestic economy - these companies have less international exposure. It also suggests expectations for continued rate cuts since smaller companies tend to carry more leverage and benefit more from lower borrowing costs.
**The counter-argument:**
Small caps are notoriously volatile and have underperformed large caps for most of the past decade. The Russell 2000 only recently broke out of a multi-year range. Some argue this is just mean reversion rather than a durable trend shift.
**Also worth noting on precious metals:**
Gold and silver have gone parabolic since last April with silver more than tripling. Central banks have been aggressively adding to gold reserves while diversifying away from Treasuries. However the gold/S&P 500 ratio is now sitting right at its long-term average - historically for gold to continue outperforming from here would require either excessive stock valuations or global financial instability (like 2008 or the early 80s inflation).
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Curious what everyone's thinking heading into earnings season 👇