In recent weeks, investors have been dumping large-cap names and focusing on smaller ones.
The “Great Rotation”, as experts call it, has caused the Russell 2000 index, which represents US small cap stocks, to rise by 8% in the first eight months of the year.
Jeffrey Hirsch, senior editor of the ” stock Trader’s Almanac“, still believes that the small-cap index is likely to move higher in the coming months.
Why are small-cap stock prices rising in 2026?
Russell 2000’s performance year-to date makes it clear that small things can be good.
Small-cap stocks have risen by “double-digits” in the past month and reached new heights. The S&P 500 is far behind, as it struggles to keep up.
Jeffrey Hirsch says that this upsurge is driven by a number of forces.
Investors expect the Federal Reserve will lower interest rates in their upcoming meetings. This is a decision that benefits smaller companies directly due to their greater reliance on debt.
Seasonal factors also play a part. Hirsch pointed out the “January Effect”, in which investors buy smaller stocks at the beginning of the year. This is especially true for those that have been beaten by the tax loss selling during the last quarter.
Russell 2000 may be able to push higher this year
Jeffrey Hirsch, in his latest report, also predicted that the Russell 2000 Index would continue to rise.
The historical data shows that small-caps stocks tend to outperform the SPX in February. This index averages a modest increase while the SPX is a stagnant market.
In fact, if you are running for midterm elections in 2026 or later, this advantage will be even greater.
Daniel Lysik, portfolio manager, echoed this view. He said that beyond seasonality the fundamentals have also started to appear more appealing.
The small-cap growth rate has now surpassed that of the larger companies, a landmark not reached in more than three years.
Lysik highlighted the valuations of small cap stocks. They are currently trading at a significant discount to larger caps, and have a P/E ratio that is roughly 30% less.
Investors who are “value-seeking”, or believe that the smaller companies have been overlooked by the market, may be attracted to this.
Bottom Line
Overall, the mood is changing. Many traders want to diversify their portfolios after a year of AI-dominated trading.
Small-cap stocks may be well positioned for outsized returns if rate reductions materialise, and the economy continues to grow steadily.
Investors should not overlook smaller companies.
The underdogs in the equity market may not have the same impact as tech giants but they are still able to deliver impressive results.
The post Russell 2000 rally – sustainable or just a ‘January Effect’? The ICD published the first post Russell 2000 rally: sustainable or ‘January effect only?
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