The Russell 2000 has posted its strongest half-year gain in 35 years—thanks to the AI boom

The Russell 2000 Index, which tracks small- and mid-cap stocks, has risen nearly 21% since the start of the year. This is the strongest performance among major U.S. stock indices and also the most successful first half of the year for the Russell 2000 since 1991. The main driver of the rally was investment in AI infrastructure, the impact of which has spread far beyond Big Tech.

The Russell 2000 Index has risen nearly 21% since the start of the year, breaking through the 3,000-point mark—its best performance in three and a half decades, according to CNBC. The index has now posted gains for the fifth consecutive quarter, marking the longest streak of quarterly gains since the market’s recovery from the COVID-19 pandemic, notes Bloomberg. In addition, the Russell 2000 outperformed the indices of large-cap companies: in the first six months, the broad-market S&P 500 index rose 9.6%, while the Nasdaq Composite technology index gained more than 12%.

Investments in AI development benefit not only large corporations but also all companies in the supply chain, especially semiconductor manufacturers and manufacturers of semiconductor fabrication equipment. Of the 50 fastest-growing companies in the Russell 2000 this year, 16 are in the semiconductor industry, including Aehr Test Systems, Ichor Holdings, and MaxLinear, each of whose stocks has risen by more than 400%, according to CNBC.

"The impact of investments in artificial intelligence is gradually shifting from large-cap leaders to smaller companies. For these companies, the effect is more pronounced—both in terms of revenue growth and potential profit growth,” said Alger portfolio manager Emi Zhang, as quoted by CNBC.

According to Zhang, the growth is driven not only by the AI boom, but also by a return to fair valuations for companies and an improvement in their fundamentals.

Improved financial performance has helped small companies offset the pressure from high interest rates, agrees Adam Turnquist, chief technical strategist at LPL Financial.

Small-cap stocks may continue to outperform their large-cap competitors thanks to accelerating earnings growth in the second half of the year, according to Jill Carey Hall, head of U.S. small- and mid-cap equity strategy at BofA Securities. According to the bank’s estimates, earnings per share for small-cap companies will grow by 25% in the third quarter, and by 36% for mid-cap companies, while large-cap companies will see growth of 25%. According to LPL Financial, since the beginning of the year, the consensus forecast for 2026 earnings growth among companies in the Russell 2000 Index has risen from 23% to 38%.

Miles Lewis, a portfolio manager at Royce Investment Partners, speaking about the long-term prospects of small-cap companies, explains in an interview with BNN Bloomberg that, historically, large and small companies have taken turns leading the market, and such cycles can last 8–12 years: “We believe we are in the early stages of such a cycle, and small-cap companies may outperform large-cap companies over the next 5–10 years. This is still ‘quiet’ growth, and many investors have not yet entered this market.”

However, in the near term, the Russell 2000 Index’s growth rate may slow amid the semi-annual rebalancing of the Russell indices. On Friday, June 26, 43 companies were removed from the Russell 2000 and moved to the Russell 1000. Historically, periods of weak performance following a rebalancing are not uncommon for the Russell 2000, notes Julian Emanuel, chief equity and quantitative strategist at Evercore.

Among the more global potential risks for small-cap stocks is a possible rise in interest rates. Tighter monetary policy is particularly sensitive for small companies, as they are more likely to use floating-rate loans. The probability of a rate hike in July is estimated at approximately 30%, and by September, the probability of at least one 0.25 percentage point hike exceeds 60%.

At the same time, despite the risks, fund managers view the outlook for small-cap companies positively. Francis Gannon, Co-Chief Investment Officer at Royce Investment Partners, notes: “To me, higher interest rates mean that the economy is doing well—and perhaps even better than expected. The track record of earnings growth among small companies currently outweighs concerns about higher interest rates.”