David Vs. Goliath: Why Small Caps Are Crushing The Magnificent 7

The Russell 2000 kicked off 2026 with fireworks, storming to fresh highs and stealing the spotlight from Wall Street's long-dominant tech elite, the so-called Magnificent Seven.

As of Jan. 15, the small-cap benchmark — tracked by the iShares Russell 2000 ETF (NYSE:IWM) — has notched intraday record highs in each of the past 10 sessions.

During the same stretch, small caps outperformed large caps every single day, beating benchmarks tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY).

To find a streak like this, investors need to go back to June 2008.

Year-to-date, the Russell 2000 is up more than 7%, sharply outpacing the S&P 500's modest 1.5% gain. Meanwhile, the Roundhill Magnificent Seven ETF (NYSE:MAGS) has gone nowhere, flat on the year.

Russell 2000 Is 2026's Early Star — Small Caps Outperform S&P 500 for Longest Streak Since 2008

Why Are Small Caps Rallying Now?

The key driver has been an improving macro backdrop. Stronger-than-expected economic data is reshaping the earnings outlook for smaller firms.

The Atlanta Fed's GDPNow model now estimates the U.S. economy grew at a 5.3% annualized rate in the fourth quarter — a pace not seen outside the post-pandemic period since mid-2014.

While a shrinking trade deficit is helping to boost the headline figure, the underlying strength points to resilient household consumption and robust business investment.

Outside of the post-pandemic rebound, growth at this pace has been rare — last seen in the second quarter of 2014, and before that in early 2006.

“Small cap revision have improved significantly ahead of the earnings season, stronger than normal,” said 22V Research analyst Dennis DeBusschere in a recent note.

"That supports small-cap performance to start the year. Large- and mid-cap revisions remain negative, roughly following historical patterns," he added.

Small-Cap Earnings Revisions Flash a Rare Signal

According to 22V Research, the percentage of small-cap companies raising guidance ahead of fourth-quarter earnings has surged, overtaking both mid- and large-cap universes. It's the first time this has happened since January 2025.

Historically, this setup has been rare and powerful. Similar patterns appeared during select periods in 2019, 2021, and early 2025 — all of which preceded sustained stretches of small-cap outperformance.

"Small caps are discounting better fundamentals," DeBusschere said, adding that the setup supports continued outperformance in the near term.

Technicals Point to More Upside

From a technical perspective, Bank of America sees room for further gains.

After breaking out of a multi-year range and forming a large base pattern, the Russell 2000 looks positioned to extend its rally, according to Paul Ciana, chief technical strategist at Bank of America.

Ciana sees upside targets at 2,642, 2,861 and potentially as high as 3,000, with notable support in the 2,450 area and critical support near 2,300.

With earnings momentum accelerating, economic growth firming, and technical breakouts stacking up, early 2026 is setting up as a classic David-versus-Goliath narrative, with small caps reclaiming center stage in investor portfolios.

Where The Gains Are Coming From

The rally has been broad-based: about 77% of Russell 2000 constituents are up this year.

That said, a handful of high-flyers have contributed meaningfully to the index's overall return.

Four small-cap stocks delivered triple-digit returns in less than two weeks. Erasca Inc. (NASDAQ:ERAS) surged 153%, Critical Metals Corp. (NASDAQ:CRML) gained 149%, Alumis Inc. (NASDAQ:ALMS) jumped 147%, and Bakkt Holdings Inc. (NYSE:BKKT) climbed 102% — all in less than two weeks.

Five individual names together contributed over 1 percentage point to the Russell's 7% year-to-date rally:

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