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▲ U.S. Stock Market, Bull Market/AI Generated Image
Small-cap stocks have exploited gaps in the big tech-dominated market, creating a first-half rally not seen in 35 years. Wall Street is leaning towards the view that the bull market is not over yet.
According to investment specialized media Barron's on July 2 (local time), the Russell 2000 Index surged 22% in the first half of 2026, marking its strongest first-half performance since 1991. During the same period, the S&P 500 Index (SPX) rose by only 10%. This is interpreted as a sign that market leadership is broadening from artificial intelligence (AI) large-cap tech stocks to small-cap stocks.
Last week, the U.S. stock market experienced high volatility. While the S&P 500 Index rose by 1.8%, the Dow Jones Industrial Average by 2%, and the Nasdaq Composite by 2.1%, the Russell 2000 Index fell by 0.4%. Meanwhile, semiconductor stocks faltered. The VanEck Semiconductor ETF dropped 3.2% over the week, and Meta Platforms' decision to sell its cloud computing assets fueled concerns about AI and cloud infrastructure oversupply.
The strength in small-cap stocks became prominent amid this fatigue with large-cap tech stocks. Jason Ware, Chief Investment Officer at Albion Financial Group, stated, "Portfolio managers are looking for opportunities beyond AI holdings." The analysis suggests that as the concentration in big tech weakens, investors are shifting their focus to small and mid-cap stocks that are more sensitive to economic cycles.
Interest rate variables remain a burden. Inflation is exceeding the Federal Reserve's 2% target, and the probability of a rate hike at the September Federal Open Market Committee (FOMC) meeting is projected at 46%. However, West Texas Intermediate (WTI) crude oil has fallen from over $110 per barrel to approximately $68, and the employment market, though not rapidly, continues to grow. Barron's reported that this combination could lead the Fed to adopt a wait-and-see approach for a while.
Steven DeSanctis, a strategist at Jefferies, analyzed that small-cap stocks rose by an average of 10% in the six months leading up to interest rate hikes and tended to outperform large-cap stocks. He explained, "Rates are being raised because the economy is strong and accelerating." DeSanctis expects the earnings of Russell 2000 constituent companies to increase by 15.7% this year, significantly narrowing the gap with large-cap stocks.
Valuation concerns have not entirely disappeared. The iShares Russell 2000 ETF is trading at just over 26 times its estimated earnings for the next 12 months, which is approximately 28% higher than the S&P 500 Index's valuation of over 20 times. However, Barron's reported that there have only been three instances since 1987 where the Russell 2000 Index outperformed the S&P 500 Index by more than 10 percentage points in the first half, and in two of those instances, it continued to outperform in the subsequent 12 months.
[Article Key Summary]
-The Russell 2000 Index rose 22% in the first half of 2026, marking its best first-half performance since 1991.
-Amid fatigue with big tech and AI investments, investors are seeking opportunities in small-cap stocks and outside large-cap technology.
-Despite concerns about interest rate hikes and high valuations, projections for earnings growth and past instances of outperformance support the argument for a continued small-cap rally.
*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*
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