The S & P 500 may be close to a new record high, but small cap stocks might prove the star of the week. The Russell 2000 is up 0.8% week to date, outpacing the S & P 500 , Nasdaq and Dow . This puts the long-suffering small cap index on track for its ninth winning week in 10, whittling down its 2025 losses to less than 4%. .RUT YTD mountain Small cap stocks are trending higher, but are still lower for the year thus far. The uptrend led BTIG chief market technician Jonathan Krinsky to float the idea of a ” smallcap summer ” in a note last weekend. But the fundamental drivers for the rally are a little harder to see, as the overall economic picture hasn’t changed that much over the past month. Some of it could be a matter of positioning. Small caps have plenty of room to catch up to larger stocks over basically any time frame you choose. And a Bank of America sales commentary note on Monday said that short interest — bets that share prices will decline — was much more pronounced in small caps than large, which could now be unwinding and pushing prices higher as sentiment improves. Another boost for small caps is that the latest economic developments, while marginal, are pointing in a positive direction. For example, the fact that inflation metrics have so far shown little impact from tariffs is good news for smaller companies from an operational standpoint and, if that allows the Federal Reserve to cut rates, from a macroeconomic standpoint as well, said Angelo Kourkafas, senior investment strategist at Edward Jones. “They are the ones that are the most sensitive to the high interest rate regime that we have, and it’s been a big headwind for the Russell 2000,” Kourkafas said. Rate cuts could also help the labor market continue to avoid shedding jobs. If the fears of a recession in 2025 recede, investors can look ahead to a rosier outlook in 2026, when the tariff situation will, in theory, be more settled and a new round of tax cuts have been enacted. “This year’s [earnings] estimates have been revised down, both for small and large caps, small to a greater extent, but 2026 estimates are holding pretty steady. So as we look at that rolling forward 12-months, it still looks pretty positive, and assuming a stable macroeconomic backdrop, we would expect small cap earnings to outperform large-cap earnings,” Kourkafas said. “There’s been many false starts, if you will, or fake-outs. But given that we’ve been in a multi-year period of depressed earnings delivery for small caps, at some point, and maybe that point is 2026, we’re going to see the cyclical re-acceleration,” he added. — CNBC’s Michael Bloom contributed reporting.
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