Riskier Small Caps Seen Outperforming in 2026 on Growth Outlook

Core Viewpoint - The recent rally in small-cap stocks, driven by falling interest rates and economic growth, is expected to continue into 2026, with small caps potentially leading market gains [1][3]. Group 1: Market Performance - The Russell 2000 Index has outperformed the S&P 500 Index for four consecutive weeks, marking the longest such stretch in two years, despite a selloff in equities [2]. - Over the past month, both the Russell 2000 and the S&P Small Cap 600 Index have increased approximately 4%, surpassing the performance of the Magnificent 7 stocks, which rose only 0.3%, while the S&P 500 Index dropped by 0.3% [4]. Group 2: Future Projections - Strategists from major firms predict that small-cap leadership will extend into 2026, contingent on further rate cuts and economic growth, as well as a shift away from high-valued megacaps [3]. - Jonathan Krinsky from BTIG anticipates that small caps will continue to outperform the Magnificent 7, especially as investors may take profits from Big Tech due to high valuations [5]. - Bank of America's Jill Carey Hall forecasts a 17% earnings growth for small firms compared to 14% for large caps, attributing this to a potential profits rebound, rate cuts, and shifting investor flows [6].