Small Caps Deliver Big Gains

• The S&P 600 small-cap index has gained 23.4% year-to-date, vastly outpacing the S&P 500 (8.1%) and even surpassing the Nasdaq-100 (15.7%), while the Mag 7 stocks are down 5.4%
• The entire S&P 600 Index is valued at approximately $2 trillion, roughly equivalent to Broadcom alone, meaning even modest investor rotation into small caps could have an outsized positive impact on returns
• Small caps are benefiting from domestic economic strength and the AI capital spending boom expanding beyond mega-cap tech companies to smaller tech and energy firms

Summary

Key Performance Metrics:

Small-cap stocks are significantly outperforming larger peers in 2026, with the S&P 600 Index up 23.4% year-to-date (through June 26, 2026), compared to 15.7% for the Nasdaq-100, 8.1% for the S&P 500, and notably a -5.4% decline for the Mag 7 stocks. Small caps have also posted strong Q2 performance at 19.2%.

Market Drivers:

The outperformance, which began gaining momentum in April, is attributed to:

• Robust U.S. economic growth benefiting domestically focused businesses
• AI capital spending expansion reaching smaller tech and energy companies
• Small caps achieving gains independent of Wall Street's favored mega-cap stocks

Market Context:

The entire S&P 600 Index has a market capitalization of approximately $2 trillion—roughly equivalent to semiconductor maker Broadcom alone. This relatively small size suggests even modest investor rotation into small caps could drive outsized returns.

Forward Outlook:

Analysts believe the momentum may persist due to:

• Potential for increased investor allocation to the sector
• Favorable borrowing conditions expected to continue, benefiting smaller companies with lower financing costs

Sector Focus:

Smaller domestically oriented businesses and small-cap technology and energy companies are the primary beneficiaries.

Implications:

The significant outperformance represents a notable shift in market leadership away from mega-cap growth stocks, potentially signaling a broader market rotation. Investors may need to reassess portfolio allocations given the substantial performance gap and the continued health of small-cap fundamentals.

*Analysis authored by Mike Dickson, Horizon Investments asset management team.*