Russell 2000 beat the S&P again yesterday (-0.1% vs -0.19%). That's 8 straight days of outperformance - hasn't happened since January 2019.
A few things driving this:
1. Valuation gap is massive. S&P 600 small caps trade at ~15.6x forward earnings vs S&P 500 at ~22.6x. That's a 31% discount.
2. Rate cut expectations. Small caps got crushed by high rates (more debt-sensitive). Fed easing helps them disproportionately.
3. Rotation out of mega-caps. The "Magnificent 7" trade is getting crowded. Money is finally flowing downstream.
For context, large caps have outperformed small caps for 5 straight years (2020-2025). The last time that happened was 1994-1998 - which was followed by 6 straight years of small cap outperformance (1999-2004).
Not saying history repeats, but the setup is interesting.
The catch: Small caps are riskier. Less liquidity, weaker balance sheets, more volatility. The Russell 2000 has ~40% of companies that aren't profitable. You can't just buy blindly.
If you're looking at small caps, focus on profitability, debt levels, and revenue growth. The junk rallies first in a rotation, but quality wins over time.