Small-cap stocks lead gains as investors favor AI infrastructure exposure over profitability, reversing historical trends.
The Russell 2000 index has climbed 20% in 2026, its strongest annual performance since 2003, driven by investor enthusiasm for small-cap companies tied to AI infrastructure. The S&P 500 has risen 11% over the same period, while the Magnificent 7 mega-cap tech stocks advanced just 4%.
Unprofitable Russell 2000 firms surged 154% since mid-2025, far outpacing the 34% gain for profitable peers. This marks a departure from traditional investing logic, where earnings typically drive outperformance. Analysts note the rally reflects bets on future AI-driven revenue growth rather than current profitability.
The shift underscores a broader market rotation beyond mega-cap tech, as smaller firms positioned for AI infrastructure buildout attract capital. However, concerns persist about stretched valuations if revenue growth fails to materialize.