The Russell 2000 just posted 13 consecutive sessions of outperformance against the S&P 500.

That's not a typo. Thirteen straight days where small caps beat the mega-cap-dominated index. The last time that happened? June 2008.

But here's the critical difference: In 2008, that streak was fear-driven — a desperate scramble for defensive positioning before the global financial crisis intensified. In 2026, it's the opposite. This is a proactive pursuit of value.

If you're still sitting in the Magnificent Seven waiting for the next leg up, you're fighting the last war.

The Setup: A 25-Year Valuation Gap Finally Snaps

By the end of 2025, the valuation gap between small and large caps had reached a 25-year extreme.

The Russell 2000 was trading at roughly 18x forward earnings. The S&P 500? 26x. The Nasdaq even higher.

That's not a gap — it's a chasm. And chasms don't stay open forever.

The Russell 2000 has surged nearly 8% in the first three weeks of 2026 alone. The iShares Russell 2000 ETF (IWM) hit all-time highs above 2,650. Meanwhile, the Nasdaq 100 has managed a meager 2% gain — flat by comparison.

This isn't the January Effect. This isn't a short squeeze. This is capital repricing risk.

Why Now? Three Converging Catalysts

1. The Fed Pivot Is Finally Real

After three consecutive 25-basis-point cuts in late 2025, the federal funds rate now sits at 3.50%–3.75%. For small caps — which traditionally carry more floating-rate debt than their cash-rich mega-cap counterparts — falling borrowing costs provide an immediate boost to their bottom lines.

The cost of capital, which had been a perennial headwind for smaller firms, has finally begun to ease.

2. Fiscal Policy Is Supercharging Domestic Investment

The "One Big Beautiful Act" (OBBBA), passed in July 2025, did more than stabilize the corporate tax rate at 21%. It reintroduced 100% bonus depreciation for capital expenditures.

For capital-intensive small firms with heavy U.S. footprints, this is rocket fuel.

Goldman Sachs analysts note that the ability to immediately deduct capital expenditures has "unlocked" billions in domestic investment. Small-cap value funds like the Vanguard Small-Cap Value ETF (VBR) have seen record inflows as institutional portfolios rebalance away from overextended tech valuations.

3. The Earnings Handoff Is Real

Here's the number that matters most: Consensus estimates project 19% earnings growth for small caps in 2026, compared to just 12% for large-cap peers.

Some analysts are even more bullish — citing 60% earnings growth projections for the Russell 2000 as mega-cap tech's growth rate decelerates from 36% in late 2024 to roughly 18% in 2026.

The Magnificent Seven haven't stopped being profitable. But their growth trajectory has flattened while small caps are just hitting their inflection point.

Who's Winning — And Who's Not

The Winners:

Regional banks have led the charge. Names like Huntington Bancshares (HBAN) and Regions Financial (RF) have posted double-digit gains as the yield curve steepens and middle-market M&A activity picks up.

Industrials and consumer discretionary stocks are thriving, buoyed by lower energy costs and the permanent 20% deduction for qualified business income from the OBBBA.

Smaller defense contractors like Kratos Defense & Security Solutions (KTOS) are benefiting from "America First" industrial policy and proposed military budget increases.

The Losers:

The previous market darlings are feeling gravity. Nvidia (NVDA) and Microsoft (MSFT) have seen their relative performance sag as investors lock in profits. Apple (AAPL) is off its 52-week high by 14%.

These companies remain profitable — but profitability isn't the question anymore. The question is: Where is the incremental growth coming from?

When the Russell 2000 is projected to grow earnings at 19%+ and the Magnificent Seven are decelerating to 12-18%, the math does itself.

The Breadth Stat Wall Street Isn't Talking About

Here's the number that should make every passive investor nervous:

65% of S&P 500 stocks are currently beating the index.

That's the second-best breadth reading in 50 years.

For the past two years, "just own the Mag 7" was a viable strategy. The narrow market leadership made passive investing look easy. But when breadth expands like this, the advantage shifts to stock-pickers who can identify the specific winners in a more dispersed market.

The equal-weight S&P 500 is up 4%+ YTD versus the cap-weighted index at roughly 1%. That's not noise — that's a regime change.

Historical Parallels: 1988, Not 2008

The June 2008 Russell 2000 streak was a temporary relief trade before the crisis intensified. Today's streak more closely mirrors the post-Black Monday recovery of 1988.

In that era, small caps led a robust economic expansion that lasted for years. The current environment shares similar characteristics: falling interest rates, a "soft landing" economic backdrop, and a massive valuation gap begging to close.

This doesn't mean the rally will be linear. The Russell 2000 has gained nearly 15% in less than three weeks — it's entering overbought territory and may consolidate. But the structural advantages are the strongest they've been in a decade.

What This Means For Your Portfolio

The rotation is already underway. Pension funds and active managers are rebalancing away from the S&P 500 — which is still heavily weighted toward a few tech giants — and into broader indices.

This influx of institutional capital into the relatively illiquid small-cap market could continue to drive outperformance through the first half of 2026.

For investors, the question isn't whether the Great Rotation is happening — it's whether you're positioned for it.

Key takeaways:

• The Russell 2000's 13-session outperformance streak ties a record from 2008 — but the sentiment couldn't be more different
• Small caps trade at 18x forward earnings vs. 26x for the S&P 500 — a 25-year valuation extreme
• Fiscal policy (100% bonus depreciation) and Fed policy (rate cuts) both favor domestic, capital-intensive small firms
• Projected earnings growth: Russell 2000 at 19%+, Mag 7 decelerating to 12-18%
• Market breadth is at a 50-year high — 65% of S&P 500 stocks are beating the index

The "Other 493" and the small-cap universe are no longer an afterthought.

They're the new leaders of the pack.

Read. Think. Invest better.