The Russell 2000 outperformed the large-cap index in the second quarter. Will the growth continue?
Since the market's last low, recorded on April 8, 2025, the Russell 2000 has risen 74.5%, and the Russell Microcap has risen 108.4% / Photo: Facebook / NYSE
Small- and micro-cap companies had a strong second quarter—the Russell Microcap Index rose 25.6%, and the Russell 2000 Index gained 21.5%. Stocks of small companies were among the top performers and will maintain these positions over the longer term, according to Francis Gannon, managing director of investments at Royce Investment Partners. In his report, he outlined which sectors grew the fastest and which factors will drive small-cap growth in the coming months.
Micro-caps are leading the way
The Russell Microcap Index rose 25.6% in the second quarter of 2026. The Russell 2000 small-cap benchmark gained 21.5%, while the Russell 1000 large-cap index rose 15.1%. The Russell Top 50, which includes the largest U.S. corporations, rose 10.7%. By comparison, the Nasdaq Composite, a technology sector index, rose 21.6%.
The U.S. stock market has nearly fully recovered from its weak first-quarter performance, with the second quarter proving particularly favorable for small- and micro-cap stocks, writes Francis Gannon, managing director of Royce Investment Partners, a fund specializing in investments in small companies, in a report. Despite ongoing geopolitical tensions, inflation, and high volatility in energy prices, growth was supported by increased spending on AI infrastructure, strong consumer spending, and improved corporate earnings, Ganón notes.
The outperformance of small-cap companies is no longer a short-term phenomenon—they are outperforming large-cap companies over longer periods: the Russell 2000 has gained 40.8% over the past 12 months, while the Russell Microcap has risen 58.5%. Ganon notes that the results since the last market low, recorded on April 8, 2025, have been particularly impressive. During this period, the Russell 2000 rose 74.5%, and the Russell Microcap rose 108.4%. By comparison, the Russell 1000 gained 52.8%, the Russell Top 50 rose 49%, and the Nasdaq Composite increased 73.1%.
The only sector in the red is the energy sector
Of the 11 sectors in the Russell 2000 Index, ten ended the quarter in positive territory and one posted a negative return: the technology, industrials, healthcare, and financial sectors saw the strongest gains, Gannon notes. According to Gannon, the energy sector made the most significant negative contribution—due to the war in the Middle East and its negative impact on the global energy market. Within the technology sector, the strongest gains were seen among semiconductor manufacturers, the software sector—which rebounded after a weak first quarter—as well as electronic equipment and components.
Growth Factors
The Royce Fund expects small- and micro-cap companies to continue growing. Gannon believes that concerns about the consequences of a potential rise in interest rates are exaggerated. “The sensitivity of small-cap stocks to rising or falling interest rates is much weaker than is commonly believed. This is especially true for companies with low debt burdens or no debt at all,” said the Royce manager.
The most important factor remains the combination of attractive valuations and earnings growth. Based on the EV/EBIT (enterprise value to earnings before interest and taxes), small-cap stocks remained near their lowest relative valuation levels in the past 25 years compared to the Russell 1000 Index as of the end of June.
However, in the long term, it is profit growth that determines investment returns, Ganon believes. He notes that the fundamental profit metrics of many small- and micro-cap companies are improving. Moreover, the AI boom has served as a catalyst for this recovery: small companies are supplying tools, components, and services to their larger partners—ranging from semiconductor components to energy companies that are critical to the operation of data centers.
Throughout 2025, we observed how the investment boom in the field of artificial intelligence—which, until the first few months of 2025, had primarily benefited megacorporations such as Alphabet, Apple, Microsoft, and Nvidia, began to extend to small- and micro-cap companies operating in the AI supply chain.
Earnings growth at small-cap companies is expected to outpace that of large-cap companies through the end of 2027. According to Royce’s estimates, earnings per share (EPS) growth by the end of 2026 will be 54% for Russell 2000 companies and 19% for Russell 1000 companies. In 2027, the figures will be 31.8% and 15.3%, respectively.
Volatility is possible
The combination of more attractive valuations and continued profit growth only reinforces our confidence that the current market environment continues to offer many interesting opportunities for active investors who rely on fundamental analysis and take a long-term view.
Francis Gannon warns that periods of growth are almost always accompanied by spikes in volatility, when investors reassess their positions and investment decisions. However, at Royce, such volatility is not viewed as a warning sign or a precursor to a major correction: “We have always viewed volatility as a natural feature of the market, one that gives long-term investors the opportunity to take advantage of short-term price fluctuations to achieve higher returns in the future,” the Royce portfolio manager concludes.
