Small-cap U.S. stocks are capping off one of their strongest first halves in decades.
But this is not your ordinary small-cap boom led by traditional businesses linked to the economic cycle
This run, like the one going on with their larger-cap peers, has been driven by the rapid buildout of AI infrastructure, as spending spreads beyond the largest technology companies to a broader network of suppliers. Investors believe the small-stock rally can broaden out beyond tech and continue, as long as interest rates stay in check. The Russell 2000 Index has surged more than 21% this year, putting the benchmark on track for its best first-half performance since 1991.
The advance marks a sharp turnaround after years of underperformance versus large-cap peers. “It’s both a valuation catch-up story and a fundamental story,” said Amy Zhang, portfolio manager at Alger. “The valuation gap was so wide that a truck can drive through it. At the same time, fundamentals are improving in small caps and I think that’s why it’s causing the broadening trade.” Semiconductor and semiconductor-equipment companies have been the biggest winners, underscoring how the AI investment boom is rippling through the broader market. Chip-related companies account for 16 of the Russell 2000’s 50 best-performing stocks this year, including Aehr Test Systems, Ichor Holdings and MaxLinear, which have all rallied more than 400%.