After spending years in the S&P 500's shadow, small-cap stocks are staging a comeback. The Russell 2000 posted its best first half since 1991, outperforming the S&P 500 and giving investors fresh reasons to look beyond mega-cap leaders.

Three things drove the move

Goldman Sachs identified three catalysts behind the rally.

First is AI infrastructure spending. As chipmakers and cloud providers ramp up investment, smaller suppliers of semiconductor equipment, components, and connectivity are capturing an outsized share of the demand.

Goldman estimates AI infrastructure stocks accounted for roughly 40% of the Russell 2000's year-to-date gains.

The second driver is a resilient US economy. Goldman economists saw US growth running between 2.5% and 3%, even through an energy shock tied to the conflict in Iran.

Small-cap companies tend to be more domestically oriented than large-caps, so a strong home economy hits their revenue lines more directly.

The third driver is biotech mergers. Biotechnology represents 11% of the Russell 2000, about 9% more than the S&P 500, and contributed roughly 10% of the index's year-to-date return.

Healthcare merger activity totaled $236B in the first six months of 2026, up 90% from the same period last year and the strongest start since 2021.

The index just lost its best performers

The semi-annual Russell rebalancing in late June reshuffled the index significantly. The 25 top-performing members (all up at least 250% in the prior year) departed for the large-cap Russell 1000.

Goldman noted the rebalancing cut the weight of AI infrastructure stocks in the Russell 2000 from 15% to 7%. That removes a significant return contributor going forward.

Evercore's Julian Emanuel said there is a pronounced tendency for small caps to give back outperformance in July following the rebalancing.

Valuations have also shifted. The Russell 2000's forward price-to-earnings ratio now sits at 26.4, above the S&P 500's ~20. That reverses the valuation discount that was one of the core arguments for owning small caps earlier in the year.

How to get exposure without excess risk

For investors looking to stay in the trade, four top-performing active small-cap ETFs have each returned more than 25% in 2026. The list includes small-cap funds from Avantis, Goldman Sachs, Fidelity and abrdn.

The Avantis fund spreads risk across more than 1.5K companies and allocates nearly a quarter of assets to financials. Analysts at Trivariate Research flagged that investors who want small-cap exposure may find small-cap value a relatively more prudent entry point than the broader index at current levels.

That caution reflects a broader concern on Wall Street. Markets are pricing in more than a 60% chance of at least one Fed rate hike by September, according to CME Group's FedWatch tool. Goldman doesn't expect that to happen, forecasting rates will remain unchanged and only low single-digit Russell 2000 returns over the next year as elevated valuations leave limited room for further gains.