The Russell 2000 trounced large caps in the first half of 2026, but Goldman Sachs strategists expect the small-cap rally to cool. They project low-single-digit gains through the rest of the year as the backdrop turns less friendly.
Goldman Sachs strategists don't expect small caps to keep leading in the back half of 2026. They forecast the Russell 2000 to gain low-single digits through what's left of the year, pointing to a less-favorable backdrop.
That call follows a standout stretch. The Russell 2000 gained 21.9% in the first half, well ahead of the S&P 500 over the same period, according to Dow Jones Market Data. The large-cap benchmark rose 9.6% in that stretch. It marked the small-cap index's strongest performance since the Covid rebound, driven by the AI trade, a supportive economic landscape, and M&A in biotech.
Why the rate outlook works against small caps
The Federal Reserve has turned more hawkish, with investors now expecting rate hikes before year end. That matters for small caps because roughly 29% of the Russell 2000's debt sits at a floating rate, so higher rates feed straight into higher borrowing costs.
The index has also shed some of what powered its run. A recent reconstitution cut the index's AI infrastructure weight to 7% from 15%, the strategists calculated, removing many of the AI plays behind the first-half gains.
Room for stock pickers
A tougher setup doesn't mean abandoning the group. Goldman says there's opportunity for selective investors, adding one more reason it's a stock-picker's market.
Source: Barron's
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