U.S. small caps are beating the S&P 500 by the widest margin in over two decades, and it's happening quietly while everyone's been staring at the megacap trainwreck.
The iShares Russell 2000 ETF (IWM) is up 20% year-to-date through June, roughly 11 percentage points ahead of the SPDR S&P 500 ETF Trust (SPY). The last time small caps led by this much, "In da Club" was topping the charts, Facebook didn't exist, and the iPhone was still four years away. So yeah, it's been a minute.
Here's what's driving the divergence.
The S&P 500's Albatross: Hyperscalers and Software
Two groups of stocks have been weighing on the S&P 500 this year.
First, the hyperscalers. Microsoft (MSFT), Meta Platforms (META), and Oracle (ORCL) are all negative year-to-date as investors rethink the massive capital expenditures behind the AI buildout and start asking the uncomfortable question: when does all this spending actually turn into profit?
Microsoft has fallen more than 20% from where it started the year, crushed by a multibillion-dollar quarterly capex ramp. Oracle just had its worst week since the 2001 dot-com bust, hit by concerns over debt-funded data-center commitments and its exposure to OpenAI.
The second group is software. Application and SaaS names have been hammered by fears that AI agents could upend the traditional subscription model — a worry that intensified after new agentic tools hit the market earlier this year. The damage is brutal: Palantir Technologies (PLTR), Intuit (INTU), Accenture (ACN), and Salesforce (CRM) have each lost between 34% and 58% this year.
So a handful of names are doing the damage. Here's the breakdown:
| Stock | Sector | YTD Return | Contribution to S&P 500 (bp) |
|---|
| Microsoft Corp. | Information Technology | -21.84% | -127 |
| Meta Platforms, Inc. | Communication Services | -13.99% | -34 |
| Tesla, Inc. (TSLA) | Consumer Discretionary | -13.06% | -28 |
| Palantir Technologies Inc. | Information Technology | -34.18% | -22 |
| Intuit Inc. | Information Technology | -58.35% | -17 |
| Accenture plc | Information Technology | -51.49% | -14 |
| Oracle Corp. | Information Technology | -23.89% | -14 |
| Salesforce, Inc. | Information Technology | -39.39% | -14 |
Source: Koyfin
The Russell 2000: Breadth Over Concentration
The Russell 2000 tells a completely different story. Its gains are spread across the index, not concentrated in a few names.
Of 1,863 constituents, 1,209 — or 64.9% — posted a positive return. Nearly 995 stocks (53.4%) gained more than 10%, 636 (34.1%) rose more than 25%, and 102 (5.5%) more than doubled. That's real breadth.
The three biggest positive contributors are all tied to the AI data center buildout: Bloom Energy Corporation (BE), up about 211%; Sterling Infrastructure, Inc. (STRL), up about 165%; and Credo Technology Group Holding Ltd. (CRDO), up about 60%. Yet their combined contribution to the index was just 274 basis points — a sign that the rally is far from narrow.
Interestingly, all three of those top contributors are now leaving the Russell 2000. In the June 2026 reconstitution, Bloom Energy — which swelled to a market value larger than many S&P 500 members after a roughly tenfold one-year run — graduated to the large-cap Russell 1000, alongside Credo and Sterling.
Top Contributors to the Russell 2000's YTD Performance
Why It Matters
So far, 2026 hasn't been a rotation out of the AI trade — it's been a rotation within it. Investors are moving away from the megacap spenders punished for their eye-watering capex and toward the smaller suppliers selling the picks and shovels.
The takeaway: the small-cap advance is powered by breadth, not a handful of high-flyers. It's the opposite of the narrow, mega-cap-driven move that defined the S&P 500 for years. And that's a healthy sign for the market — even if it feels like 2003 all over again.
