Small Caps Are Beating the S&P 500 by the Widest Margin Since 2003. Here's How to Invest.

The Russell 2000 has surged over 20% in the first half of 2026, outpacing the S&P 500 by the widest margin in 23 years. Small-cap stocks are closing a valuation gap while capturing AI infrastructure tailwinds that initially benefited mega-caps.

Earnings growth estimates for the Russell 2000 have jumped from 23% to 38% as AI spending reaches smaller companies. The index (IWM) last posted similar relative strength versus large-caps in 2003, when small-caps led a multi-year outperformance cycle.

The performance gap reflects both mean reversion and a broadening of the AI investment theme beyond the Magnificent Seven. Smaller firms with exposure to data center buildouts, edge computing, and AI-adjacent infrastructure have re-rated as institutional capital rotates into names trading at discounts to their large-cap peers.

Broad small-cap ETFs offer direct exposure to the Russell 2000's momentum, with IWM as the primary vehicle tracking the index.