The Russell 2000 has outperformed the S&P 500 each of the last ten days, bringing its YTD lead over large caps north of 5%. This begs the question, are large caps finally passing the torch to small caps?
Mega caps have been the dominant market force in recent years, handily outpacing other areas, and particularly small caps. As a result, large caps were a key focus within most portfolios entering 2026. Ironically, mega cap stocks have been among the weakest performers this year, with the Invesco S&P 500 Top 50 ETF (XLG) down 0.5% YTD. Conversely, small caps have been leading the way to the upside, with the Russell 2000 (RUT) up more than 6% YTD. The Russell 2000 is now on pace to outperform the S&P 500 (SPX) for the ten trading days—the longest streak since 2008. Given the shift this year, are large caps finally passing the torch to small caps?
One supporting notion behind the resurgence of small caps is that recent movement isn’t coming out of nowhere. Last month, we noted that the Russell 2000 beat the S&P 500 over the last six months of 2025. In 23 prior instances where small caps bested large caps in the second half of the year, the Russell 2000 averaged 1.4% of outperformance versus SPX in the following year, with all of that coming in the first month. Conversely, when small caps lagged in the second half, the Russell 2000 underperformed the S&P 500 by an average of 2.6% the following year. While last year’s finish supports the recent Russell rally, does early-year strength historically translate into rest of year outperformance?
Since 1979, there have been eight other years when the Russell 2000 outperformed the S&P 500 by more than 2.5% through the first two weeks. In those cases, the Russell 2000 averaged a 9.36% gain for the remainder of the year, compared to 11.9% for the S&P 500. Therefore, early small cap strength has not signaled sustained leadership, as large caps typically regain ground. Furthermore, each of the last six years in which small caps outperformed early saw the group underperform across the rest of the year. Our current period also overlaps with the “Modified January Effect” (Dec 15–Jan 15), during which the Russell 2000 has historically outperformed the S&P 500 by about 1.4% since 1997. Given the seasonal trend and lack of historical follow-through, excess returns during this period don’t seem particularly significant, especially over the last decade.
On a relative basis, small caps still have ground to make up against large caps. Over the past five years, the Russell grew a cumulative 23% compared to 82.5% for the S&P 500, underscoring the sizeable difference in their two long-term trends. The iShares Russell 2000 ETF (IWM) is back at all-time highs while trading in a positive trend, earning a solid fund score of 4.38. However, the iShares S&P 500 Index (IVV) still holds a more robust score of 4.94, due largely to the fact the it holds long-term market relative strength, whereas IWM has been on an RS sell signal versus the S&P 500 Equal Weight (SPXEWI) since January of 2022.
The Russell 2000 has a real shot to outperform SPX for the first since 2020, and it’s been a decade since small caps beat large caps more by more than 5% (2016). Despite encouraging positioning right now, small caps have been volatile in recent years, so further improvement and consistency are needed before we crown them market leaders. That's not to say small cap don't look good, just that large caps continue to hold the throne for now given their long-term relative strength
