economy
January 26, 2026
Small-cap stocks are on fire to start 2026. Here's what's driving them, and the risks they face
The Russell 2000 beat the S&P 500 for 14 days to start the year, the longest streak since 1996. Analysts are still bullish despite the rapid rally.
TL;DR
- The Russell 2000 has outperformed the S&P 500 for the longest streak since May 1996.
- Analysts anticipated upside for small-cap stocks in 2026, expecting them to outperform large caps for the first time since 2020.
- The Russell 2000 is up 7.5% year-to-date, its best start since 2021, while the S&P 500 is up only 1%.
- Potential catalysts for the surge include a 'January effect' and expectations of Federal Reserve rate cuts.
- Morgan Stanley suggests earnings improvement, which began in Q3, is a key driver for small caps.
- Risks include economic slowdowns, rising long-term yields, and the potential for the Fed to tighten borrowing conditions.
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