I owe you an apology, small cap stocks. I wasn't really familiar with your game.

• Small cap stocks are crushing the broader market this year.
• It's quite the shift from the past two years, when they've gotten trounced.
• Outlined below are three main reasons for the sudden outperformance.

I'd like to issue an apology.

It's directed at small-cap stocks, which populate the recently unloved tier of companies with market caps between $250 million and $2 billion.

I'm here to say I'm sorry that I overlooked them for so long, opting to breathlessly cover Magnificent 7 mega-cap stocks like Nvidia, Tesla, and Alphabet as they reached new trillion-dollar heights.

Fast forward to the start of 2026, and small caps are making me eat crow for ignoring them.

The Russell 2000 index is up 8% this year, multiple times the S&P 500's 1.4% return. It also outperformed the S&P for an 12th straight day on Monday, the longest such streak since 2008.

It's a stark shift from the previous two years. It's not that small caps did poorly, per se, it's just that they lagged their bigger peers. Since the start of 2024, through the end of last year, the S&P 500's 44% return was nearly double the gain for the Russell 2000.

So why, for the first time in a while, does David have the upper hand on Goliath? For a few reasons:

1. A valuation rotation

Put in the simplest terms, small caps are cheaper than their bigger counterparts at current levels. This should come as no surprise to anyone who's heard the seemingly endless cries of a bubble forming in AI.

There's no denying that the S&P 500 is full of fantastically profitable companies. But the index sits at records, priced to perfection. Investors are naturally looking for a better deal.

2. Bullish economic outlooks

Sometimes inexpensive stocks are cheap for a reason, and can be a trap for value-hunting investors. There still has to be a compelling fundamental reason to buy something.

Luckily, for small caps, that comes in the form of an overwhelmingly bullish economic outlook from firms on Wall Street. (Small caps have historically lived and died with the economy.) As the most bullish bank on the block, Morgan Stanley is one firm pinning hopes on economic expansion generating strong earnings growth — especially for small caps — in the first half of 2026.

3. Rate cuts

Small caps are one of the most rate-sensitive areas of the stock market. Rate cuts = good. Rate hikes = bad. Well, investors are currently pricing in two more cuts in 2026, which seems to be enough for small-cap bulls at the moment.

So can small caps keep it up? One stat compiled by Bloomberg would seem to suggest yes. Going back to 1979, the Russell 2000 has outperformed the S&P 500 in January by more than 500 basis points on five occasions. All but one of those times, the Russell index finished the full year on top.

I'll keep an eye on it. And if small caps do keep dominating, I pledge to give them as much love as the big guys.