If the first few trading sessions of the year are any indication, 2026 is set to be the year of the small-cap trade. The Russell 2000 hit all-time closing and intraday highs Thursday, putting the small-cap benchmark up 7.8% year to date — far ahead of the S & P 500’s 1.5% advance. Several drivers have conspired to send small caps soaring. They include expectations of Federal Reserve rate cuts later this year as well as data pointing to strong U.S. economic growth. Small caps tend to be more sensitive to changes in the economy and Fed policy, as more of their business is inside the U.S. rather than overseas. .RUT .SPX YTD mountain Russell 2000 vs S & P 500 year to date The group has also benefited from a rotation out of large cap stocks. Bank of America data showed clients were net buyers of small caps in 2025, adding $6.4 billion in single stocks and ETFs. By contrast, they were net sellers of mid-cap and large stocks, dumping $5.7 billion and $45.9 billion, respectively. The technical picture for small caps also looks attractive. “After a multi-year range breakout, a head and shoulders base and improving relative strength vs SPX, small caps look positioned for a rally to … 2,861, maybe 3,000 / 3,126,” Paul Ciana, technical strategist at BofA, wrote earlier this week, referring to the Russell 2000 index, which closed at about 2,675 on Thursday. Those targets correspond to advances of 7%, 12.2% and 16.9%, respectively. .RUT 1Y bar Russell 2000, 1yr bar chart The outperformance may be getting a bit stretched, however. The Russell’s relative strength index sits at 71, signaling it’s overbought and potentially due for a pullback. Barclays traders also point out that the iShares Russell 2000 ETF ( IWM ) has recently outpaced the Invesco QQQ Trust, which tracks the Nasdaq-100. The former is up more than 8% over the past three months, while the latter has gained just 3.6%. “That is not to say that small caps cannot continue to work, but … the opportunity set is less compelling and consequently the team would rather ‘take profits’ on this view and consider themes elsewhere,” Barclays said.
