Small Caps Are Winning the Year but Losing the Scorecard to Large Caps
By price, 2026 has been the year small caps finally showed up. The Russell 2000 was up roughly 20% for the year as of late July, outpacing the S&P 500, according to a Yahoo Finance analysis published July 20, and the small-cap benchmark added another 0.54% in Tuesday's session even as the large-cap indexes barely moved. By earnings, the picture is far less flattering.
The gap shows up first in beat rates. In the first-quarter season that wrapped up earlier this year, Russell 2000 companies topped estimates at a rate in the high-50s to low-60s percent range, compared with 84% to 85% for the S&P 500, according to an analysis published by the LongYield research newsletter in July. Small caps historically clear a lower share of estimates than large caps, the analysis notes, but the spread this cycle has been unusually wide, and it frames the second-quarter season now reaching its meaningful stretch for smaller companies, whose reports cluster later than the mega caps.
The composition of the small-cap index explains much of the shortfall. Roughly 40% of Russell 2000 constituents generate no earnings at all, a share that has more than doubled from about 17% two decades ago, according to reporting from International Business Times citing Wells Fargo research. The bank's analysts wrote that the shift 'has left public small-cap indexes with a larger share of younger, less profitable and more speculative companies.'
Estimate revisions have moved in opposite directions, too. Over the first five months of 2026, earnings forecasts for the Russell 2000 declined about 7% while S&P 500 forecasts rose 8%, per the same International Business Times report. Wells Fargo's team concluded that the rally's momentum 'is masking weakness in underlying small-cap equity fundamentals.'
Large caps, by contrast, are stacking records. The current second-quarter season has produced an 86% EPS beat rate for the S&P 500 and the largest aggregate earnings surprise FactSet has recorded since 2008, as covered in this publication's season scorecard. In the first quarter, per LongYield's analysis, S&P 500 earnings grew 28.6% on a record blended net margin near 14.8%, while Russell 2000 profit growth landed in the mid-to-high 30s percent range against expectations of 44.9%, a strong number flattered by the small denominators of a partially unprofitable index.
So why are the stocks working? Valuation and rotation are the most common answers. Small-cap ETFs tracked by Yahoo Finance trade at price-to-earnings multiples between roughly 15.7 and 17.4 times, versus about 21 times for the S&P 500, and the article argues the rally 'reflects a broadening of market participation' rather than a retreat from the AI trade.
The tension between those two readings is what the back half of the small-cap reporting season will test. If second-quarter results from smaller companies close the beat-rate gap with large caps, the 2026 rotation gets a fundamental underpinning it has so far lacked. If they do not, the market will be left weighing a 20% index gain against forecasts that have been falling all year, a spread that history suggests does not stay wide indefinitely in either direction.
