Small-Cap Stocks Outperform As A.I. Trade Unwinds

Small-cap stocks continue to outperform the broader market as the artificial intelligence (A.I.) trade unwinds.

The technology-laden Nasdaq Composite (NASDAQ:$NDAQ) index is down nearly 10% and on the verge of a correction as high-flying chip stocks associated with the A.I. buildout plunge.

Shares of SanDisk (NASDAQ:$SNDK) and Micron Technology (NASDAQ:$MU) have each fallen more than 30% in the past month as jitters over A.I. spending worsen.

In contrast, small-cap stocks, defined as any security with a market capitalization of less than $10 billion U.S., continue to trend higher in the current market.

The Russell 2000 index of small-cap stocks is up 17% year-to-date and the best-performing bourse in America.

In fact, the Russell 2000 is on pace for its best annual performance since 2003 at the tail end of the dotcom bubble bursting.

The rise in the Russell 2000 index this year is more than double the 8% year-to-date gain in the benchmark S&P 500 index. The Nasdaq is up 7% on the year despite falling in the past month.

This year is the first time in more than a decade that small cap stocks have meaningfully outperformed mega-cap technology stocks such as Microsoft (NASDAQ:$MSFT) and Amazon (NASDAQ:$AMZN).

Earnings forecasts support continued outperformance of small cap stocks, according to analysts.

Consensus forecasts for Russell 2000 companies' 2026 earnings growth have climbed to 38% from 23% at the start of 2026.

Leading small-cap stocks include names such as clothing retailer Abercrombie & Fitch (NYSE:$ANF), restaurant chain operator Brinker International (NYSE:$EAT), and ride-hailing firm Lyft (NASDAQ:$LYFT).