Core Viewpoint - The Russell 2000, a small-cap index, has shown strong performance at the start of 2026, outperforming the S&P 500 in the first 14 trading days of the year, indicating a potential shift in market dynamics favoring small-cap stocks [1][4]. Performance Comparison - The Russell 2000 has built a significant lead over large-cap stocks in the first three weeks of 2026, contrasting its underperformance in the previous five years [2][4]. - Historically, the S&P 500 has outperformed the Russell 2000, particularly during the AI boom, but the current trends suggest a possible reversal in 2026 [4]. Valuation Insights - The S&P 500 has seen a price-to-earnings (P/E) ratio of 28, making it one of the most expensive periods in its history, while the Russell 2000 ETF trades at a P/E ratio of 19.5, representing a discount of about one-third compared to the S&P 500 [5][6]. - For the Russell 2000 to match the valuation of the S&P 500, it would need to increase by approximately 50%, which may encourage a rotation from large-cap to small-cap stocks [6][7]. Interest Rate Impact - Small-cap stocks are more sensitive to macroeconomic factors, particularly interest rates. The Russell 2000 has increased by 17% over the last six months due to three rate cuts by the Federal Reserve, lowering the benchmark rate by 75 basis points [8]. - The Federal Reserve is currently forecasting one additional rate cut this year, but there is potential for more cuts, which could further benefit small-cap stocks [9]. Investment Opportunities - The iShares Russell 2000 ETF (IWM) is the largest small-cap ETF with net assets of approximately $75 billion, providing a straightforward way to gain exposure to small-cap stocks [10]. - Individual small-cap stocks such as Amplitude, a digital product analytics software company, and Innodata, a data-labeling specialist, are highlighted as potential breakout candidates for 2026 due to their growth prospects [11]. - The overall outlook for small-caps in 2026 appears positive, with various investment vehicles available for capitalizing on the expected market rotation [12].