When Small Caps Move, They Move Big

• Small cap stocks broke out to new highs last September.

• This has happened three prior times since 2010.

• The Russell 2000 Index averaged a 40% gain in 21 months in those instances.

The breakout everyone’s noticing now actually started a year ago…

Small caps don’t usually ring a bell before they move, but last July, they did. At the time, I pointed out that the setup in the Russell 2000 Index was hard to ignore: economically sensitive names pressing against multi‑year resistance just as domestic output was accelerating. By September, the breakout arrived. And since then, the Russell 2000 has quietly surged roughly 21%, outpacing large caps and validating the call…

Now the rest of Wall Street is waking up to what was hiding in plain sight. The Russell 2000 is a domestic engine. About 81% of its revenue comes from inside the U.S., according to Morningstar. And with the country in the early innings of a massive AI‑driven infrastructure buildout, the beneficiaries aren’t just the mega‑caps writing the checks. It’s the construction firms, electrical component makers, truckers, service operators, and restaurants. They’re the backbone of the small‑cap universe.

That’s why this corner of the market remains one of the most compelling setups in equities. Small caps are tied directly to the strength of the U.S. economy, they’re under‑owned, they’re undervalued, and they’re levered to a capex cycle that’s still gaining momentum. If the Atlanta Fed’s 2Q GDP forecast of 2.5% holds, this group isn’t done rallying. Not even close.

And history backs that up. This pattern has played out three prior times since 2010, and each breakout has led to an average gain of roughly 40% before the next peak. If that script holds, small caps still have meaningful room to run—and plenty of catching up to do relative to their large‑cap counterparts.

But don’t take my word for it, let’s look at what the data’s telling us…

Let’s start with the Russell 2000 in 2020. The gauge peaked in September 2018 at 1,728. Over the next couple of years, it moved sideways as the Federal Reserve raised interest rates, then collapsed during the COVID crash in early 2020…

It wasn’t until the domestic economic recovery in late 2020 that the small‑cap gauge began to rebound. In November 2020, the index finally made a new closing high at 1,747. The rally stalled in November 2021 as the economy overheated, but not before the Russell 2000 rose 39.8% in just 12 months.

We see the same scenario play out between 2015 and 2018…

The Russell 2000 peaked in June 2015 at 1,294, then slid into early 2016 as investors worried about collapsing Chinese growth. Once fears of a global meltdown eased, small caps rallied again. By late 2016, the gauge hit our trigger point, closing at 1,298. Over the next 22 months, it climbed to 1,740, for a gain of just over 34%.

Now let’s look at our final example. We see the same setup and outcome play out between 2011 and 2015…

The Russell 2000 peaked at 865 in May 2011, then sold off into October amid concerns about a European debt crisis and slowing U.S. growth. When the Federal Reserve announced plans to buy $600 billion in Treasurys, liquidity fears eased and stocks began to recover. By early 2013, the Russell 2000 broke out to a new closing high of 873. The rally continued until June 2015, when the index peaked at 1,294. That meant an increase of more than 48%.

Let’s look at the average duration and return over those periods…

Like I said at the start, small‑cap stocks are breaking out. The Russell 2000 has even more room to run. Based on the past three times we’ve seen this scenario play out, the index has averaged a 40% rally over the following 21 months. Don’t be surprised when this sequence of events plays out again.

Five Stories Moving the Market:

Iran’s Islamic Revolutionary Guard Corps attacked a Singapore-flagged cargo ship in the Strait of Hormuz, according to two senior U.S. officials, testing the deal signed last week by the U.S. and Iran to end the fighting and reopen the vital shipping lane – WSJ. (Why you should care – shipping traffic through the Strait is quickly approaching pre-conflict levels)

The U.S. wants to reach a deal with Iran to end the war but won’t do so “at any price,” according to Secretary of State Marco Rubio; he reiterated that tolls in the Strait of Hormuz were unacceptable – Bloomberg. (Why you should care – Rubio said the U.S. will not accept a deal that gives any one country control of the Strait of Hormuz)

Federal Reserve ​Bank of New York ​President John Williams said that while inflation ​pressures are likely to moderate ​this year they remain too high; Williams said the federal funds target rate is currently well positioned to bring inflation back to target – Reuters. (Why you should care – Williams, a policy voter, is signaling he’s unlikely to support either raising or lowering rates any time soon)

The Pentagon has quietly revised its doctrine on how the U.S. military picks its targets in battle, opening the way for artificial intelligence to make critical wartime decisions in the future; the revised targeting principles envision “systems where AI initiates actions with human monitoring” – Bloomberg. (Why you should care – expanded military use of AI-related systems will likely increase the need for compute power and the relevant infrastructure)

Samsung Group is expected to announce plans to invest 1,000 trillion won ($647.53 billion) in South Korea over 10 years, including a potential ​300 trillion won to build chip factories in the southwest of the country; the investment will include AI data centers, ⁠batteries and displays – Reuters. (Why you should care – the announcement points to the rising demand for AI infrastructure components like semiconductors and optical equipment)

Economic Calendar:

ECB’s Nagel (Germany) Speaks (4:30 a.m.)

U.S. – Retail and Wholesale Inventories for May (8:30 a.m.)

U.S. – University of Michigan Consumer Sentiment Index for June (10 a.m.)

Fed’s Williams (New York, Voter) Speaks (10:30 a.m.)

Fed’s Kashkari (Minneapolis, Voter) Speaks (11:30 a.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)