The early weeks of 2026 have defined a turning point in the US stock market. The Russell 2000 index, tracking 2,000 of the smallest US public companies, jumped nearly 8% in January, while the S&P 500 and tech giants stayed flat or declined. Analysts view this as the start of a true structural change in the market.
Key reasons include the Federal Reserve's three consecutive rate cuts at the end of 2025, a move that significantly benefits small companies relying on floating-rate loans. Additional factors were significant tax breaks approved last year, and record economic growth: real GDP grew 5.4% in the fourth quarter of 2025.
The Russell 2000 is traditionally highly sensitive to domestic economic cycles. When the economy accelerates, these companies experience disproportionate growth in demand for their goods and services. New tax incentives, such as immediate expensing of capital investments and improved tax treatment, also boost small-cap profits.
However, almost 40% of Russell 2000 companies remain unprofitable. The market is pricing in a near doubling of earnings in coming years, but analysts warn of the need to distinguish between well-financed “fortress” firms and “zombie” companies with chronic losses and high debt. If borrowing conditions worsen, many weaker firms may not survive.
2026 could be a turning point: analysts forecast small-cap profit growth at 19%, outpacing large companies for the first time in years. Financials, industrials, and regional banks are gaining momentum, and the IPO market is reviving after years of stagnation.
There are risks: potential rises in borrowing costs, Fed policy uncertainties, vulnerability to trade tariffs and inflation shocks. The small-cap sector shows promise, but investors should exercise careful selection.
