Small Caps Extend 13-Day Winning Streak as "Great Rotation" Reshapes US Equity Markets

The Russell 2000’s 13-day winning streak represents one of the most significant market rotations in recent memory, fundamentally reshaping the equity market’s leadership structure. As of January 22, 2026, the Russell 2000 closed at $2,718.77, having reached an intraday high of $2,735.10 during the session [0]. The iShares Russell 2000 ETF (IWM) simultaneously reached new all-time highs above $2,650, closing at $269.79—a 0.75% gain for the day and confirming the broad-based nature of small-cap strength [0].

The contrast between small-cap and large-cap performance during this period is striking. While the Russell 2000 surged approximately 9.11% from $2,492 to $2,719 between January 2 and January 22, the S&P 500 managed only a 0.51% gain ($6,878 to $6,913), and the NASDAQ Composite actually declined 0.19% ($23,481 to $23,436) [0]. This 45 basis points per day of outperformance represents a meaningful shift in capital allocation that has caught the attention of institutional investors globally [2].

The Bloomberg Television program “The Close” featured extensive expert commentary from financial industry leaders including Amy Kong of Corient, Stephen Steinour of Huntington Bancshares, Matt Bryson of Wedbush Securities, and numerous other Wall Street analysts [1]. The diversity of expert perspectives underscores the significance of this market development and the need for nuanced analysis of both the opportunities and risks involved.

The small-cap rally is not occurring in isolation but represents the convergence of multiple macroeconomic and policy factors that have created an unusually favorable environment for domestic small-capitalization companies. Understanding these interconnected drivers is essential for evaluating the sustainability of this rotation.

The Federal Reserve’s 2025 easing cycle has reduced the federal funds rate to 3.50%, a development that disproportionately benefits small caps due to their higher proportion of floating-rate debt [2]. Small-capitalization companies typically carry more variable-rate debt than their large-cap counterparts, making them more sensitive to interest rate changes. The transmission of lower rates into reduced financing costs has improved profitability outlooks for small businesses across multiple sectors, particularly those in capital-intensive industries.

The passage of the “One Big Beautiful Bill Act” (OBBBA) in 2025 provided retroactive tax relief for service-sector small caps and established a permanent 20% deduction for qualified business income [2]. This structural tax advantage represents the most small-business-friendly policy environment in over a decade, directly addressing a long-standing competitive disadvantage that small companies faced relative to large corporations with more sophisticated tax planning capabilities.

Analysts project the Russell 2000 will deliver approximately 60% earnings growth in 2026, dramatically outpacing large-cap expectations [2]. Alternative estimates suggest small-cap earnings growth of 17-22% for 2026, still beating large-cap results [3]. This acceleration reflects operational improvements, consumer health indicators, and the benefit of prior-year weakness creating favorable year-over-year comparisons. The magnitude of these projections, if realized, would fundamentally alter the valuation calculus for small-cap investing.

Lazard’s Ronald Temple coined the term “AI gravity” to describe how massive capital expenditures and elevated valuations are making mega-cap tech stocks less attractive to institutional investors seeking reasonable growth rates [4]. The concentration of gains in the “Magnificent Seven” mega-cap technology stocks had created overcrowded positions, and the rebalancing away from these positions has provided a substantial inflow of capital into small-cap strategies. Investors are finding better “Growth at a Reasonable Price” (GARP) opportunities in the Russell 2000, prompting sustained capital reallocation.

Today’s sector data reveals a bifurcated market that strongly favors economically sensitive sectors where small caps have significant representation. Basic Materials led all sectors with a 1.15% gain, followed by Consumer Cyclical at +0.60% and Healthcare at +0.55% [0]. These sectors are characterized by higher domestic revenue exposure and greater sensitivity to economic growth trajectories.

Conversely, interest-rate-sensitive sectors lagged significantly. Utilities declined 2.70%, the largest sector move of the day, followed by Real Estate at -0.46% and Consumer Defensive at -0.46% [0]. Technology, despite its strong performance in 2025, also lagged at -0.17%, reflecting the ongoing rotation away from mega-cap growth names [0].

Regional banks have been notable beneficiaries of this rotation, with Huntington Bancshares (HBAN) and Regions Financial (RF) seeing double-digit gains during the streak period [2]. The Financial Services sector, while slightly down on January 22 (-0.05%), has been a primary beneficiary of the overall small-cap momentum, benefiting from steepening yield curves and improved net interest margin expectations.

The 13-day winning streak ties a record established during the volatile summer of 2008, but the market environment differs fundamentally from that period. The 2008 streak was fear-driven, occurring as investors sought relative safety within domestic small caps during the early stages of the global financial crisis [2]. The current streak, by contrast, is optimism-driven, reflecting confidence in the domestic economic outlook and belief that small caps have not fully participated in recent market gains.

However, the historical comparison warrants caution. Both streaks occurred during periods of significant market stress and uncertainty. The 2008 streak preceded a period of extraordinary market dislocation, though causation should not be confused with correlation. The current streak’s sustainability will depend on the actual delivery of projected earnings growth and the Federal Reserve’s continued support of the easing cycle.

The breadth of small-cap participation suggests this is not merely a speculative rally but reflects genuine institutional rebalancing. The Russell 2000 has recorded 8 or more all-time closes in 2026 as of January 22, demonstrating sustained buying interest rather than short-covering dynamics [0]. Pension funds, active managers, and quantitative strategies are all believed to be increasing small-cap allocations, potentially creating a self-reinforcing cycle of inflows and performance.

The Financial Services sector’s particular strength—driven by regional banks—indicates that investors are making specific sector bets rather than simply buying small caps broadly. This selectivity suggests professional money managers are conducting fundamental research and identifying specific opportunities within the small-cap universe, a hallmark of sustainable trend beginnings.

The small-cap leadership represents a potential structural shift in how markets allocate capital between large and small companies. The concentration of market capitalization and trading activity in mega-cap technology stocks had reached historic levels, creating valuation disparities that are now correcting. The Russell 2000’s performance may mark the beginning of a multi-year small-cap bull market if earnings growth materializes as projected.

The term “Great Rotation” captures the magnitude of this shift [2]. Unlike tactical sector rotations that may reverse over weeks or months, this rotation appears to be driven by fundamental changes in relative earnings growth expectations, interest rate sensitivity, and policy support. If these factors remain favorable, small-cap leadership could persist throughout 2026 and beyond.

The convergence of favorable factors—easing monetary policy, supportive tax legislation, strong earnings projections, and institutional rebalancing—creates an attractive setup for small-cap exposure. The breadth of participation across sectors suggests this is not a narrow, speculative rally but a fundamental repricing of domestic small-capitalization companies.

Specific opportunities exist within regional banks, which have benefited from steepening yield curves and improved net interest margin expectations. Industrials and consumer discretionary sectors offer exposure to domestic economic growth, while healthcare small caps provide innovation potential without the valuation extremes of large-cap biotech.

The upcoming earnings season will be critical for validating current expectations. If small caps deliver on the 60% growth projection, the rotation could mark the start of a multi-year small-cap bull market [2]. Stock selection within the Russell 2000 remains essential, as the rally is not universal across all small-cap names.

The Russell 2000’s 13-day streak has pushed the index into overbought territory after a nearly 15% gain in less than three weeks [5]. The Relative Strength Index (RSI) and other momentum indicators suggest the index may be due for a consolidation phase. Traders and investors should factor this into position sizing and risk management strategies.

The 2008 13-day streak was fear-driven and temporary before the global financial crisis intensified [2]. While the current streak is optimism-driven, it could face reversal if macro conditions deteriorate unexpectedly. The comparison serves as a reminder that extraordinary performance streaks often precede significant corrections.

Stock selection is critical as many small-cap names will struggle with competition and execution challenges [6]. The small-cap rally masks significant dispersion among individual companies, and the ability to identify winners within the Russell 2000 will determine investment outcomes more than broad market direction.

Small caps are more vulnerable to economic slowdowns than large-cap peers. Any signs of recession would disproportionately impact the Russell 2000. Additionally, small-cap stocks typically have lower liquidity than large-cap names, which can amplify volatility during both advances and declines.

While fundamentals have improved, the rapid price appreciation may have already priced in much of the positive catalysts. The sustainability of the rally depends on actual earnings delivery, and any disappointment could trigger meaningful corrections.

The Russell 2000 small-cap index has achieved a historic 13-consecutive trading day winning streak against the S&P 500, representing the strongest small-cap relative performance since 2008 [1]. This “Great Rotation” from mega-cap technology to domestic small caps is being driven by the Federal Reserve’s easing cycle to 3.50%, favorable tax policy under the OBBBA, and projected earnings acceleration of 17-60% for 2026 [2][3].

The index has gained approximately 15% in less than three weeks while the S&P 500 has risen only 0.51% and the NASDAQ has declined 0.19% [0]. Sector rotation favors economically sensitive sectors including financials, industrials, and consumer discretionary, while interest-rate-sensitive sectors and mega-cap technology lag behind.

Technical indicators suggest the index has entered overbought territory, and the upcoming earnings season will be critical for validating current expectations [5]. The sustainability of this rotation depends on actual earnings delivery, continued Federal Reserve support, and the absence of adverse macro developments.