The Russell 2000, an index that tracks small-capitalization U.S. stocks, concluded the first half of 2026 with a gain of over 21%, its strongest performance for that period since 1991. Analysts have pointed to the performance of companies related to the artificial intelligence sector as a significant factor in the index’s growth.
The advance follows several years in which the small-cap index underperformed its large-cap counterparts. According to market data, much of the recent growth has been concentrated in semiconductor and semiconductor-equipment companies. Sixteen of the Russell 2000’s 50 best-performing stocks during the first half of the year were from the chip-related industry. Companies including Aehr Test Systems, Ichor Holdings, and MaxLinear each reported stock price increases of more than 400%.
Amy Zhang, a portfolio manager at Alger, commented on the market dynamics. “It’s both a valuation catch-up story and a fundamental story,” Zhang said. “The impact of AI investment trickles down from large-cap leaders to small-cap companies. The effect will be more amplified for small-cap companies, in terms of revenue and probability growth.”
Some financial strategists have noted that factors beyond artificial intelligence are also contributing to the index’s performance.
“Small-cap leadership has been notable amid the mega-cap-driven bull market, although small caps have meaningful exposure to semiconductors and technology hardware,” said Adam Turnquist, chief technical strategist at LPL Financial. “Building fundamental strength has also helped offset headwinds from higher rates.”
Data from LPL Financial indicates that consensus forecasts for the 2026 earnings growth of Russell 2000 companies have increased to 38%, up from approximately 23% at the beginning of the year.
Analysts have also identified rising interest rates as a factor that could affect small-cap companies. The Federal Reserve’s next policy meeting is scheduled for July 28-29. Data from the CME Group’s FedWatch tool indicates that, as of June 30, traders were pricing in a 30% probability of a rate increase in July and a more than 60% probability of at least one quarter-point hike by September.
An estimate from Bank of America strategists stated that each 25-basis-point increase in interest rates would reduce Russell 2000 operating earnings by approximately 2%. The strategists noted in a report that smaller companies could face “the most refi risk” due to their debt structures.
Commenting on the interest rate environment, Zhang said, “We’re probably close to peak inflation and peak rates.”
