History Says This Small-Cap Rally Isn’t Done Yet
History Says This Small-Cap Rally Isn’t Done Yet
- The Russell 2000 recently broke back above its 200-day moving average.
- There have been 11 similar instances since the financial crisis.
- They led to outsized gains for the index one year later.
Small capitalization stocks are poised for more gains…
Lately, the Nasdaq Composite and S&P 500 have been stealing headlines. Both are dominated by large-cap technology stocks—and since the rally began in early April, momentum investors have increasingly shorted the tech sector, anticipating a reversal.
Yet with domestic economic data and earnings coming in better than feared, asset managers who were short tech have started to cover. In fact, many of them are now increasing their long exposure to the group. That momentum shift has fueled the surge in the S&P 500 and Nasdaq Composite.
Meanwhile, another economically sensitive group of stocks has quietly staged a comeback…
At the end of June, the small-cap–focused Russell 2000 Index climbed back above its 200-day moving average for the first time since late February. That’s a sign the current rally is broadening. And based on historical data, that should mean above-average forward returns for the index moving forward.
But don’t take my word for it, let’s look at what the data’s telling us…
The Russell 2000 was launched in 1984 by the Frank Russell Company, though activity records go back to 1978. It’s a widely followed benchmark that tracks roughly 2,000 of the smallest publicly traded U.S. companies. It’s also a subset of the broader Russell 3000 Index, which includes the 3,000 largest U.S. stocks.
While the S&P 500 is a measure of America’s corporate titans, the Russell 2000 provides a window into the entrepreneurial engine of the U.S. economy. That’s because small-cap stocks tend to be more volatile and sensitive to interest rates, inflation, and domestic economic growth.
Consequently, Wall Street views the Russell 2000 as a barometer of investor sentiment, risk appetite, and economic conditions. So, when trends in small-cap stocks begin to shift, it's worth paying attention.
And as noted earlier, the index broke above its 200-day moving average in late June.
That average is significant because it reflects long-term trend momentum. When an index falls below the 200-day, it can become a technical ceiling. But when it breaks above, it often signals renewed support.
Back in February, when the Russell 2000 began to break down, Wall Street was gripped by worst-case fears over tariffs, global economic stagnation, and runaway inflation. Asset managers fled risk assets. And given small caps’ economic sensitivity, the index plunged nearly 28% from its November high to its April trough.
But so far, the economic collapse and rising price spiral haven’t materialized. Inflation isn’t back below 2%, but it's hovering near those levels. And while job growth has slowed, it hasn’t cratered. That has fueled the Russell 2000’s rebound on a more optimistic growth outlook.
To assess what’s next, I looked at prior instances where the Russell 2000 reclaimed its 200-day moving average after a breakdown. I found eight similar cases since the financial crisis, using a minimum 3-month gap between breakdown and recovery. Here's what happened…
These results were calculated using price return data. They show that small caps tend to post strong gains one year after breaking above the 200-day moving average, with an average return of 18.1%. That’s well above their long-term average of roughly 9.1% annualized since 1978. And the success rate is high to boot.
So, as I said at the start, it’s time to take notice of a key trend shift. This one stands out. And based on past precedent, the Russell 2000 should see healthy gains over the coming year.
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