By James Mackintosh
While market watchers obsess about the dominance of a handful of gigantic stocks, smaller companies are the real winners this year.
The scale of outperformance is chunky. The Russell Microcap index of market tiddlers is up 21%, the Russell 2000 small-capitalization index a bit less, and the S&P 500 only slightly over half as much. Go to the very largest, and the Russell Top 50 index of super-megacap stocks is up only 6%, with the Magnificent Seven stocks up even less.
How it happened is a tale of speculation, the oil panic and the rotating winners from artificial intelligence, with a walk-on part for the weird way indexes work.
Investors should be paying attention, both to understand why smaller stocks did so well, and why it might not last.
Speculation is most obvious in the tiniest companies. Penny stocks, usually defined as those that trade for less than $5 a share, are often opaque and get zero attention from Wall Street analysts. When they go up this quickly, it's often more about a frenzy among investors than underlying economic fundamentals.
Since March 30, penny stocks have risen 28% on average, well above the 22% of non-penny stocks in the Microcap index -- and beat the Mag 7 of Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia and Tesla. Unlike the Mag 7, the tiniest companies were slightly up in the first quarter, too.
Gambling in penny shares adds to a sense of wild speculation more widely in stocks. Just look at the demand for AI-linked stocks: Three loss-making IPOs are about to be among the most-valuable listed companies. Investors are cheering on capital spending so big that it moves the economy without knowing quite how it will make money. And companies have quintupled or more their value simply by announcing they are pivoting their business.
The second big factor was the war. There's been a big shift since the first quarter, when the U.S.-Israeli attack on Iran led to a race to sell the biggest companies. The Mag 7 might not be the most exposed to higher oil prices -- think airlines -- but they fell 16% in the first three months, dragging down the whole market. The smallest stocks performed the best.
Economically this makes sense. The U.S. is a net exporter of petroleum products, which cushions the hit to consumers from higher fuel prices. Companies with a domestic focus should do better than multinationals exposed to countries in Europe and Asia that were hit much harder.
There's also a straightforward financial explanation: In a panic, you sell what you can, not what you want. The biggest stocks are mostly the easiest to sell, while teeny stocks are often hard to get out of.
On top of that, smaller companies have been out of favor for ages, so a rotation -- which started in November last year -- was overdue.
Then there is weirdness among the indexes, which skews our view of reality. Since March there's been a swing back to AI stocks, with extraordinary gains for chip stocks and certain power companies, even after this week's wobble. Bizarrely, some of these now-huge companies have actually helped the indexes of smaller companies because of the timing of Russell rebalances.
Two examples stand out: Bloom Energy and Sandisk. But there are plenty more.
Bloom, a fuel-cell producer, is a member of the Russell 2000, where it languished for several years. But it's now worth $83 billion, putting it in the biggest 150 stocks by value in the country, bigger than NXP Semiconductors or 3M.
When the annual reconstitution happens later this month, Bloom will almost certainly jump straight to the very-large Russell 200 index, the first time a stock has vaulted straight from small to megacap, missing out midcap, since at least 2008. Until then, its gains count toward the gauge of smaller companies. It's a rise to inspire jealousy: Bloom's up 235% this year and more than 14-fold in the past 12 months, as fuel cells proved appealing to data-center operators.
Sandisk, a maker of memory chips and drives, also tapped demand for AI. It doesn't make the expensive memory crucial to the most intense AI applications, but its products are still in demand -- and its shares have soared as a result. It is the country's 45th-most valuable company -- at $261 billion -- but still classed as a midcap, the smallest 800 of the Russell 1000 index.
As they grew, these companies became far larger than the rest of their small and midsize brethren, so their continued gains gave an outsize boost to the indexes.
Such stocks have been moving so fast that FTSE Russell will now switch stocks between indexes twice a year, not just once, in an effort to reduce these weird effects.
I like the idea that investors are willing to consider smaller companies and diversify away from the massive stocks dominating the market. But it bothers me that the last two times that small-caps beat the biggest by so much, it was painful for investors.
In 2021, they followed the crowd into a bubble that burst in small tech, SPACs and cannabis stocks. And in late 2022 and early 2023, many followed the crowd into small stocks as they rebounded strongly, only for them to stagnate while Big Tech powered ahead. The gap isn't so big as in 2021. But when speculative small stocks win big, often it's because investors aren't thinking straight.
Write to James Mackintosh at james.mackintosh@wsj.com
(END) Dow Jones Newswires
June 05, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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