The Three Factors That Have Finally Brought the Small-cap Trade to Life

Goldman Sachs said the three key catalysts for the Russell 2000's recent outperformance were the artificial-intelligence industry, a strong economic backdrop and a boost in biotechnology stocks.

The Russell 2000 has recently outperformed the S&P 500, and three factors are driving the move, according to Goldman Sachs.

The small-cap stock index is up 20.5% since the start of the year and 37% since this time last year. Meanwhile, the S&P 500 SPX rose 9% over the past six months and has climbed 21% since the same time in 2025 - a stark difference considering that in the past 15 years, the Russell 2000 RUT has underperformed by nearly 300%.

Strategists at Goldman Sachs, led by Ben Snider, wrote in a note on Thursday that the three key catalysts for growth were the artificial-intelligence industry, a strong economic backdrop and a boost in biotechnology stocks.

"One major driver of recent small-cap strength has been the AI trade," Snider and his team wrote in a note late Wednesday.

About 40% of the small-cap index's year-to-date returns can be attributed to AI infrastructure stocks, and it also benefited from avoiding the slump of "Magnificent Seven" stocks, which delivered no returns for the S&P 500 in the first half of 2026. But the strategists also see this AI tailwind reducing following the rebalance of the sector's weighting in the index from 15% to 7%.

Another driver of the Russell 2000's growth is a strong economic environment, they said.

"The health of the cyclical economy is usually the most important macro driver of small-cap U.S. equities, and resilient economic activity has also contributed to the Russell 2000 strength so far this year," they wrote, adding that despite the energy shock driven by the war in Iran, Goldman economists saw U.S. economic growth of between 2.5% and 3% in the past few months.

However, the strategists noted that if the Federal Reserve does cut interest rates in the coming quarters, which is not the bank's base case, it would particularly harm small-caps, as about a third of the Russell 2000 is floating debt versus just 7% of the S&P 500.

The surge in biotechnology stocks has also helped to raise the Russell 2000 this year, according to Goldman. The sector has an 11% share of the index - 9% more than the S&P 500 - and accounts for around 10% of returns.

"One reason for this strength is the ongoing wave of M&A," the strategists said, adding that it totaled $236 billion in the first six months of the year, 90% higher than in the first half of last year and "the strongest start to a year since 2021."

But because of declining earnings-per-share estimates for constituents of the Russell 2000 and upward revisions for the S&P 500, analysts have cut their estimates for the small-cap index by 9% and raised their forecasts for the S&P 500 by 9%.

-Nora Redmond

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July 02, 2026 07:15 ET (11:15 GMT)

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