Examining whether or not small-cap outperformance tends to hold longer term
AI spending and advancements have accelerated over the last few years, subsequently giving rise to the “Magnificent Seven," or Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN), Meta Platforms (META), and Tesla (TSLA). These megacap stocks have accounted for a disproportionate share of market returns. It’s a major reason the large cap S&P 500 Index (SPX) has outperformed the small cap Russell 2000 Index (RUT) for each of the past five years.
The start of this year, however, has been different. The RUT has gained over 7% so far, compared to just over 2% for the SPX. Even more notably, the RUT outperformed the SPX for each of the first 14 trading days of the year. Last Friday, Jan. 23 was the first day of 2026 that the SPX had a better day than the RUT. In the analysis below, I examine similar streaks to see if the small-cap outperformance tends to persist, or if short- to medium-term mean reversion is more likely.
Win Streaks: RUT vs. SPX
We have RUT data going back to 1988, and the recent 14-day win streak for the RUT vs. the SPX is the second longest on record. The longest streak lasted 16 days and ended in May of 1996. The table below summarizes subsequent RUT returns beginning on the first day the SPX outperformed the RUT, following a RUT win streak of at least eight consecutive trading days.
The data shows the RUT outperformance tends to continue, especially in the short term. In the month following the RUT win streaks, the index averaged a 2.72% return with 79% of the returns positive and most importantly, outperforming the SPX 74% of the time. By six months, the outperformance isn’t present with the RUT basically flat on average and beating the SPX just under half the time.
The tables below show how the SPX performed after the same RUT win streaks as above. The SPX, like the RUT, outperformed its typical returns in the short term, averaging a one-month gain of 1.49% vs. 0.83% any time. Six months after these streaks, the SPX underperforms big time, averaging a slight loss of -0.36% with 53% of the returns positive. The typical six-month average is 4.98% with 75% of the returns positive.
Finally, the chart below shows the average performance of the SPX and RUT after these streaks of small-cap outperformance. Both indexes show a lot of momentum immediately after the streaks end with the RUT outperforming. Then right around three months they pull back and become more volatile. Ultimately, both indexes get to negative territory just after five months before ending up near breakeven after six months.
The question becomes whether this sustained small-cap outperformance is an indicator of near-term buying pressure that can push markets higher over the next few months. That would be good but the data above also showed that short-term buying tended to be climactic ending in longer term underperformance.
