Wealth managers debate whether small-cap rally is here to stay

The Russell 2000 small-cap index is up over 6% in 2026 and 17% in the past 6 months. The large-cap S&P 500 meanwhile has returned 2% YTD in 2026 and 9% in the past 6 months. 

That’s a sizable outperformance by any measure.

So for advisors looking to grow their client portfolios, is going small the best strategy in 2026?

Rafia Hasan, chief investment officer at Perigon Wealth Management, for one, says the resurgence in small cap stocks, which have struggled in recent years, feels like a “natural progression of the economic cycle.” Smaller companies generally tend to be more vulnerable to the overall economic environment. That's why she deems it "unsurprising" that small cap stocks have thrived in the wake of resurgent US economic growth, a supportive monetary policy environment and the One Big Beautiful Bill Act that enables 100% depreciation on research and CapEx.

“No one has a crystal ball – if the overall economic environment remains positive to benign – there appears to be continued room for growth in this segment of the market. However, small cap stocks are also more vulnerable to shocks so to the extent there are policy announcements like unexpected tariffs that could derail the current strong momentum we are seeing,” Hasan said.  

Elsewhere, Andrew Graham, founder and portfolio manager at Jackson Square Capital, believes monetary, fiscal, and regulatory tailwinds have US GDP growth accelerating, which aligns with cyclical sector outperformance and in turn boosts small cap companies. He adds that small cap stocks also use more floating rate debt than large cap companies, which means they disproportionately benefit from recent Fed rate cuts. 

Furthermore, Graham thinks the recent slowing in wage growth also disproportionately benefits small cap companies that tend to be more labor intensive. 

All that said, Austin Graff, chief investment officer at 49 Financial, says recent small-cap strength appears less about a durable shift in fundamentals and more about positioning and rotation. In his view, the small-cap rally is “more technical than structural.”

“We see it largely as a short-term trade driven by capital rotating out of the most crowded large-cap and Mag 7 names into under-owned parts of the market. That dynamic can create sharp moves, but it doesn’t necessarily reflect improving long-term prospects for small-cap companies themselves,” Graff said, adding that many macro forces—particularly currency dynamics—haven’t meaningfully improved for domestically oriented small firms.

At current valuation levels and with equity markets broadly elevated, Graff does not see a compelling case that small caps, as an asset class, will sustainably outperform large caps through 2026.

“Any continued momentum would likely depend more on ongoing rotation than on improving fundamentals,” Graff said.

If the goal is to participate in a broadening of market leadership beyond mega-cap growth, Graff says his preference is the mid-cap segment rather than small caps, particularly at today’s market levels.

“Mid-caps offer exposure to that rotation while maintaining stronger balance sheets and greater improvement in fundamentals,” Graff said.