Three weeks ago, I wondered if the leadership rotation this year toward small- and micro-cap stocks would persist. There have been multiple false dawns in recent years as large caps and growth stocks regained the performance crown after a burst of small-cap strength. The case for arguing this time is different is still shaky, but small-cap strength persists, based on a set of equity risk factor ETFs through yesterday’s close (Feb. 3).

Leading the charge higher this year: micro caps (IWC), which is still running hot in 2026 and posting an 8.7% year-to-date gain. In close pursuit: small-cap value (IJS) and small-cap core (IJR). Large-cap value (IVE) and large-cap (IVW), by contrast, are trailing by wide margins, as is the equity market benchmark via SPDR S&P 500 ETF (SPY). To top off the point, note that large-cap growth is slightly in the red so far this year via an 0.8% loss.
 

We’ve been here before and so a healthy dose of skepticism is still in order before assuming that this year’s leadership shift is the new world order for the stock market will prevail in the months (and years?) ahead. As reported on these pages many times in recent years, early signs of a small-cap resurgence have come to naught. In Oct. 2024, for example, some analysts predicted that a turning point in favor of small caps had arrived, which prompted our question: Are Reports Of Small-Cap Stocks’ Revival Prospects Premature?

The answer was forthcoming: small caps continued to struggl, again, to keep pace, much less outperform, large caps.

As this year kicks in, the question of staying power is again topical, and once again there are analysts giving encouraging odds that the small-cap rally will persist and thrive. A familiar refrain: valuations for smaller companies look enticing when compared to lofty heights for large caps, led by the tech darlings.

“According to our valuations, we think they have further to run,” reasoned Morningstar Chief US Market Strategist Dave Sekera last week.

Looking forward, our economics team forecasts at least two more cuts to the fed-funds rate this year and long-term interest rates to fall further. Plus, the AI buildout boom has spurred faster-than-expected economic growth. Historically, small-cap stocks perform best when the Fed is easing monetary policy, long-term interest rates are declining, and the rate of economic growth is reaccelerating.

Eric Diton, president and managing director of The Wealth Alliance, is also on the bandwagon and forecasts earnings momentum will keep the small-cap train running. “Small stocks have been crushed by large stocks’ outperformance in the last 15 years,” he notes in an interview with Reuters a few days ago. But the tide is turning, he says. The engine for the shift: “We’re expecting some big small-cap earnings this year and next. We’re overdue for some big small-cap outperformance.”   

Using the iShares Small Cap Core ETF (IJR) as a benchmark suggests the tailwind of optimism continues to blow strong from the perspective of the trend bias.
 

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If IJR can muster another leg up and take out its previous high at just over 130, the case for expecting it’s different this time will strengthen. That alone won’t ensure an extended run of outperformance, but it’s a start. Rebuilding confidence and laying the foundation for a durable run of small-cap leadership will take time, but repair and recovery efforts are off to an encouraging run in the early weeks of 2026.

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