Since the start of the new year, the performance of U.S. small-cap stocks has significantly outpaced that of large-cap stocks. The Russell 2000 Index has risen over 6% this month, outperforming the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite Index at the beginning of 2026. The recent strong performance of small-cap stocks marks their longest winning streak relative to large-cap stocks in seven years. Data shows that the Russell 2000 Small-Cap Index, which has outperformed the S&P 500 for seven consecutive trading days, closed at a record high on Monday. The last time the index achieved a longer streak of outperformance dates back to January 2019.
Analysis suggests that this phenomenon may be driven by the “January effect,” a pattern where small-cap stocks tend to perform strongly in the first month of the year. Market experts point out that at the beginning of the year, investors are inclined to seek value stocks that were overlooked by the market in the previous year.
This rally may persist for longer. The Russell 2000 Index and the S&P 600 Small-Cap Index have lagged behind large-cap indices for many consecutive years. The market anticipates that this trend could reverse in 2026, thanks to lower interest rates and the resilience of the U.S. economy, as small companies typically hold more floating-rate debt compared to large companies. Additionally, favorable valuations could also lend support. Small-cap stocks are often traded at a discount compared to blue-chip stocks, and the current discount is larger than usual. According to data, the S&P 600 Small-Cap Index currently trades at a price-to-earnings ratio of approximately 15.6 times based on 2026 earnings expectations, which is 31% lower than the S&P 500’s P/E ratio of 22.6 times. The average discount for this index over the past five years was only 25%, so there is still room for small-cap stocks to rise if the valuation gap narrows.
Analysts are also optimistic about the performance of small-cap stocks in non-technology sectors. Peter Roy, a portfolio manager at Argent Capital, expressed his bullish outlook on industrial and healthcare stocks, mentioning companies such as aerospace and defense equipment manufacturer RBC Bearings (RBC) and Ensign (ENSG), which operates skilled nursing and senior living centers. Roy also noted that an increase in mergers and acquisitions (M&A) activity this year would not be surprising due to low interest rates and a favorable regulatory environment, which could provide a boost for small-cap stocks. He believes that small waste collection and landfill companies, such as Casella Waste Systems (CWST), could become acquisition targets for larger competitors. Roy also thinks small banks may be acquired.
After years of focusing almost exclusively on market giants, it may be time for investors to shift their attention back to small-cap stocks. For small-caps, this could be more than just a fleeting rally lasting only through January.
