Small Caps Posted Their Best First Half Since 1991, Crushing The S&P 500 And Nasdaq: Why Analysts Think Rally Isn’t Over Yet

The Russell 2000 index has far outperformed benchmark indexes, including the S&P 500, Dow Jones, and Nasdaq, in the first half of 2026.

• Charlie Bilello, Chief Market Strategist at Creative Planning, noted in a post on X that U.S. small caps had gained more than 22% in the first half of 2026.
• All 11 sectors in the Russell 2000 ended the first half of the year in positive territory, according to Franklin Templeton, with technology the biggest contributor. 
• As per the firm, the most important point to consider is that the combination of small-cap valuations and earnings “should be more than sufficient to keep the asset class in the leadership role.”

Small-cap stocks seem to be having their day in the sun, with their best first-half performance since 1991, as per Charlie Bilello, Chief Market Strategist at Creative Planning.

In a post on X, the analyst said that U.S. small caps had gained more than 22% in the first half of 2026, “their best first half performance since 1991.”

“Their outperformance vs. Large Caps of over 12% was the widest for a first half since 2001,” he added.

This is indeed true – the Russell 2000 index, which tracks the performance of about 2,000 of the smallest publicly traded companies in the U.S., has far outperformed benchmark indexes, including the S&P 500, Dow Jones, and Nasdaq, in the first half of 2026.

According to data from Koyfin, the Russell 2000 gained nearly 22%, while the S&P 500 and Dow Jones gained about 9% each, and the Nasdaq rose about 13%.

Technology Leads Small Cap Gains

All 11 sectors in the Russell 2000 ended the first half of the year in positive territory, according to Franklin Templeton.

Technology was the biggest contributor, the investment management firm said, followed by industrials, financials and healthcare, while semiconductors, electrical equipment, banks and electronic equipment were among the top-performing industries.

The trend seems to have been strong, especially in the second quarter of 2026, with small and micro-cap stocks leading the way. “In the bullish second quarter of 2026, small- and micro-cap stocks continued to lead the US equity markets in a robust period for equities of all sizes and styles,” Franklin Templeton said earlier this week.

“Resilience amid mixed signals was once again the main theme, as geopolitical tensions remained unresolved, inflation lingered, and energy prices were still volatile, depending on the changing state of the war with Iran on any given day,” it added.

Meanwhile, the ETFs tracking benchmark indexes, the SPDR S&P 500 ETF (SPY), the Invesco QQQ Trust (QQQ), and the SPDR Dow Jones Industrial Average ETF Trust (DIA) were all trading higher at the time of writing, with sentiment in the green. The iShares Russell 2000 ETF (IWM) was also trading higher, although sentiment was ‘bearish’ at the time of writing.

Can The Small Cap Momentum Sustain?

As per Franklin Templeton, the trend is likely to continue through the year, even though “small-cap market leadership is scarcely 15 months old.”

The firm said that its research found that the sensitivity of small-cap performance to interest rate changes is not as closely correlated as is often assumed, as “it also tends to discount (if not ignore) the performance of small-cap companies with little or no debt.”

As per the firm, the most important point to consider is that the combination of small-cap valuations and earnings “should be more than sufficient to keep the asset class in the leadership role.”

Morningstar Wealth chief multi-asset strategist Dominic Pappalardo also holds a similar belief. “The quiet surge in small caps has momentum to continue,” Pappalardo said, as per a report on the website from Wednesday.

The firm noted that U.S. small-cap equities have underperformed their large- and mid-cap peers over the past 15 years. Pappalardo believes the group is more diversified than large caps: “40% of the S&P 500 is made up of the top 10 names, and nine of those are tech or tech-related,” he said.

At the same time, the 10 largest small caps account for a much smaller percentage of the small-cap indexes. Meanwhile, the top 10 constituents make up a much smaller share of small-cap indexes.

Moreover, on a relative basis, small-cap stocks appear to be more undervalued now than they have in a long time, the report noted, adding that the Wealth team believes large caps look overvalued.

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