Why have small-caps performed so well this year?

Investing.com -- The Russell 2000 has returned 23% in the first half of 2026 and 41% over the past 12 months, its strongest performance since the COVID rebound, but Goldman Sachs said the outlook for the second half is more subdued.

Analyst Ben Snider wrote in a note to clients on Thursday that the AI trade has been "a major driver of recent small-cap strength," with AI infrastructure stocks contributing roughly 40% of the Russell 2000's year-to-date return.

Small caps have also benefited by avoiding the drag from the Magnificent Seven, which returned 0% in the first half of 2026.

However, Goldman noted that last week's index reconstitution cut the weight of AI infrastructure stocks in the Russell 2000 from 15% to 7%, removing some of the largest contributors to the index's year-to-date return.

Outside of AI, Goldman stated that a healthy economic backdrop and surging healthcare mergers and acquisitions have also supported small-cap performance, with Russell 2000 stocks outperforming S&P 500 companies in nine of eleven sectors year-to-date. Biotechnology has contributed 10% of the year-to-date return.

On earnings, analysts model 48% EPS growth for the Russell 2000 in 2026, twice the 24% projected for the S&P 500. However, Goldman noted that analysts have cut Russell 2000 2026 EPS estimates by 9% year-to-date, while rising valuations have accounted for roughly half of the small-cap return so far.

Goldman added that the combination of elevated valuations and near-trend economic growth "points to low single-digit Russell 2000 returns in the next 12 months," with a hawkish Fed representing a particular downside risk given that nearly 30% of Russell 2000 stocks are unprofitable and 29% of debt is floating rate.

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