Russell 2000 Outperforms S&P 500 in Historic 10-Day Streak
The Russell 2000 index has achieved a significant milestone by outperforming the S&P 500 for ten consecutive trading days, marking the longest streak since June 2008. This small-cap index’s impressive performance has increased its year-to-date lead over large caps by more than 5%, according to Nasdaq Dorsey Wright.
Record Highs and Shifting Market Dynamics
On January 8, the Russell 2000, tracked via the iShares Russell 2000 ETF (IWM), reached a record high of 2,603.90. This achievement has been part of what analysts are calling the ‘Great Rotation,’ where small caps have surged ahead of tech-heavy mega-caps. As of mid-January, the index has gained 5.8% year-to-date, significantly outpacing the approximately 2.0% gain in the Nasdaq 100, signaling a shift in market leadership.
The rally has been further highlighted by the Russell 2000, the equal-weighted S&P 500, and the Semiconductor Index all pushing new all-time highs, demonstrating the strength of small-cap and broader market participation.
Analyzing the Drivers Behind the Surge
Several factors are driving the Russell 2000’s surge. A more accommodative Federal Reserve, with recent rate cuts bringing the federal funds rate down to 3.50%–3.75%, has provided a supportive environment for economically sensitive small-cap stocks. Additionally, the July 2025 ‘OBBBA’ legislation reinstated 100% bonus depreciation, benefiting small-cap firms with high capital expenditures.
Valuation differentials also play a critical role. By the end of 2025, the Russell 2000 was trading at a forward P/E of around 18×, compared to the S&P 500’s approximately 27×, highlighting the relative cheapness of small caps. Earnings projections for 2026 further support this move, with small-cap earnings growth expected at 17%–22%, outpacing the S&P 500’s projected 14% growth.
Cautionary Notes and Historical Context
Despite the strong start, historical patterns suggest caution. In previous instances since 1979, when the Russell 2000 outperformed the S&P 500 by over 2.5% in the early weeks of the year, it only gained about 9.36% for the rest of the year, compared to 11.9% for the S&P 500. Additionally, the current rally coincides with the ‘Modified January Effect,’ where the Russell 2000 historically outperforms the S&P 500, suggesting the possibility of mean reversion.
Small-cap stocks inherently carry more risk, as evidenced by the Russell 2000’s maximum drawdown of 41.75% over the past decade, compared to 33.79% for the S&P 500. This, combined with a weaker Calmar ratio, illustrates smaller companies’ volatile nature.
Market Sentiment and Expert Commentary
Market analysts from Goldman Sachs and Morgan Stanley are emphasizing the ‘mean reversion’ narrative, highlighting small caps’ steep valuation discounts and renewed institutional interest. Reddit and market commentators also note the historical significance of the streak, while cautioning about the volatility and liquidity challenges associated with small caps.
In conclusion, as of January 16, 2026, the Russell 2000’s 10-day outperformance streak versus the S&P 500 signifies a pronounced shift in market dynamics. While current momentum favors small caps, investors should remain mindful of historical trends and the inherent risks associated with smaller companies.
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