The Russell 2000 and S&P SmallCap 600 indexes are each up about 12% year-to-date, signaling a small-cap resurgence is afoot – one confirmed by those gauges sharply outperforming the large-cap S&P 500.
Small-caps’ rebound is good news for investors because in what feels like a familiar script, a small number of stocks are driving large-cap benchmarks to the upside. That bleeds into the old conversation about concentration risk. Just three stocks combine for about 20% of the S&P 500, but small-cap indexes are more diverse. For example, no stock commands more than 1.84% of the Russell 2000’s weight.
Small-cap stocks deserve credit. For the 12 months ending March 31, the group beat large-caps and some of that durability accrued against the backdrop of the war in Iran, which in theory should have been a headwind to smaller stocks. On a related note, the war obviously stoked inflation, lengthening the odds of the Federal Reserve cutting rates this year. That makes small-cap strength all the more impressive because these companies are rate-sensitive.
So with the headwinds out of the way, small-cap catalysts are worth examining and a couple of important ones are in place, potentially portending more upside for this corner of the equity market.
Small-Cap Sparks Abound
As Fidelity points, part of the small-caps’ good news proposition today is access to impressive earnings growth at undemanding valuations.
“Two things have already changed for the better in the small cap equity universe as of the first quarter of 2026: 1) Small caps are now backed by historically attractive relative valuations and 2) the earnings and sales outlooks look far rosier than in recent years,” according to the asset manager.
(Image: Fidelity)
In addition to the attractive valuations and earnings growth, the small-cap case is support by a resilient U.S. economy (smaller companies are more domestically focused) and corporate tax cuts, but the valuation situation is something to beheold.
“As of March 2026, U.S. small caps were in their cheapest quintile vs. large caps since 1990,” adds Fidelity. “In the near term (three years or less), relative valuation has not been a great predictor of the relative performance of small caps, but as we look over longer periods, the historical odds for small cap outperformance become more compelling. When U.S. small caps reached the cheapest quintile over the past 35 years, small caps tended to outperform, especially in subsequent 5- and 10-year periods.”
Being Judicious With Small-Caps
As advisors know, not all small-cap stocks are cut of the same quality cloth. In fact, the Russell 2000 Index is littered with money-losing companies. To be precise, 41% of that index’s members aren’t profitable.
That statistic may highlight the allure of the newly minted Fidelity Enhanced Small Cap Growth ETF (FSEG), and the Fidelity Enhanced Small Cap Value ETF (FSEV), which are actively managed ETFs. That status is pertinent now because as the “junky” feel of some small-cap gauges confirms, the constraints of small-cap indexes can disadvantage investors. Active management reduces that concern.
“One way to try to take advantage of the breadth of Russell 2000 components is through actively managed small cap products. Stock selection opportunities can be rich in the small cap market, which tends to be less efficient than large caps,” concludes Fidelity.
Related: Preferred Stocks Are Quietly Beating Bonds in 2026—Here’s Why Advisors Should Pay Attention