Small caps last week: Russell 2000 outperforms, Freedom 2H optimism, AeroVironment up

Last week, small caps gave investors more reason for optimism as the Russell 2000 posted its strongest first-half performance in 35 years, outperforming the major U.S. large-cap indexes. Freedom Broker expects the outperformance to continue through the end of the year. Against that backdrop, drone maker AeroVironment's strong earnings reinforced the fact that demand for defense technologies remains robust. These and others are the top small-cap stories for June 29-July 3 in our latest weekly recap.

In a new strategy outlook, Freedom Broker forecasts the S&P SmallCap 600 will reach 2,000 points by the end of 2026, implying 10.8% upside. Meanwhile, it expects the S&P 500 to end the year at 7,900 points, representing 5.3% upside.

According to Freedom Broker, smaller companies should benefit from a recovery in domestic demand, easing inflation, and a favorable interest-rate trajectory, owing to their greater sensitive to funding costs and credit conditions. Over the next 12 months, Freedom expects the outperformance to widen further, with the S&P SmallCap 600 projected to gain 19.2%, versus 8.7% for the S&P 500.

Interparfums, which develops, markets, and distributes fragrances for Montblanc, Jimmy Choo, Coach, and other well-known brands, could see a fresh growth driver in 2027 with the launches of lines for David Beckham, Longchamp, and Off-White. Despite slower sales growth this year, analysts remain upbeat on the stock and continue to rate it a "buy."

In a new Oninvest deep dive, we explain how this relatively small company built a high-margin, asset-light business around licenses from luxury brands, why fragrance remains the most accessible segment of the luxury segment, and what the management believes will accelerate growth in the coming years.

The Russell 2000 small-cap index has gained around 21% year to date, climbing above 3,000 points and outperforming the S&P 500 (+9.6%) and the Nasdaq Composite (+12.0%). It is the index's strongest first-half performance since 1991, CNBC reports. The Russell 2000 has also posted its fifth consecutive quarter of gains, its longest winning streak since the market's recovery from the pandemic, Bloomberg notes.

CNBC writes that the rally has been supported not only by AI investment but also by improving valuations and stronger corporate fundamentals. Analysts, however, caution that the Russell indexes' annual reconstitution, which moved 43 companies into the Russell 1000, could weigh on the momentum over the coming weeks.

Shares of drone maker AeroVironment rose around 19% on Tuesday after the company reported quarterly revenue and profit that topped expectations. The company's order book increased 65% over the last year, supported by strong demand for drones, counter-drone systems, and space technologies. AeroVironment also reaffirmed its fiscal-2027 revenue guidance of $2.13-2.23 billion.

While the stock is off more than 20% year to date, the management expects the market to continue expanding, with the Pentagon's budget for drone systems next year potentially exceeding $75 billion. Wall Street remains unanimously bullish on the company. All 14 analysts covering the stock have a "buy" rating, according to MarketWatch data. Their average target price of $241.50 per share implies around 26.5% upside from the Friday closing price.