The Market’s Best Kept Secret?
US micro-cap stocks are having a moment.
This may come as something of a surprise since the financial press has not written or said much about how well this important—and opportunity-rich—subset of small-cap has performed over the last several months. In fact, we feel confident saying that many investors don’t know that micro-caps have been leading the US equity markets for more than a year now, dating back to the market low on April 8, 2025. We’d also be willing to bet that a sizable number of investors have only a vague idea that the asset class exists in the first place.
To be sure, it sometimes requires a little effort on our part to establish the fact that small-caps as a group (never mind their more diminutive siblings) have enjoyed different long-term performance patterns than large-caps—and that the two asset classes have historically jockeyed for leadership in cycles that, for small-cap, have averaged around 10 years.
So, while we have been investing in small- and micro-cap stocks for more than 50 years, we are used to having to evangelize a bit about why small- and micro-cap stocks are worthy of consideration in any long-term investment plan. Additionally, the lengthy nature of prior small-cap leadership tenures is one of three reasons why we’re confident that small- and micro-cap stocks can stay in the driver’s seat for a long time. (The two other reasons are covered below.)
We believe this even as the recent results for micro-caps have been nothing short of stellar—on both an absolute and relative basis:
For the year-to-date period ended 6/30/26, the Russell Microcap rose 27.5% compared to 22.6% for the small-cap Russell 2000 Index, 10.3% for the large-cap Russell 1000 Index, and 2.0% for the mega-cap Russell Top 50 Index.
For the 1-year period ended 6/30/26, the Russell Microcap Index advanced 58.5%, the Russell 2000 Index rose 40.8%, the Russell 1000 Index gained 22.0%, and the Russell Top 50 was up 16.3%.
From the market low on 4/8/25 through 8/14/26, the Russell Microcap increased 109.0%, the Russell 2000 rose 77.2%, the Russell 1000 gained 58.6%, and the Russell Top 50 was up 54.0%.
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What’s Driving Micro-Cap Performance?
Much of the attention that small- and micro-cap stocks have been getting over the last several months has been tied to the increasingly important roles that many smaller companies have been playing in the AI infrastructure buildout, which covers everything from semiconductors (and related components and services), data center construction, and enhanced power needs.
It’s no surprise, then, that in the first half of this year, Information Technology led all sectors within the Russell Microcap Index, powered by robust performance from the semiconductors & semiconductor equipment industry, which was up 183.2% and contributed more than 400 basis points to the index’s year-to-date return.
However, biotechnology, banks, and software were also strong performers. All told, 10 of the index’s 11 sectors contributed to year-to-date results, with health care, industrials, financials and energy (which has admittedly been volatile due to the war with Iran) also contributing meaningfully. Utilities was the only detractor, and its losses were marginal.
From the April 2025 low through the end of June 2026, all 11 sectors were in the black. Somewhat surprisingly, health care was the biggest contributor, followed by information technology, financials, and industrials. Within health care biotech was especially strong thanks both to robust performance—a gain of 228.3%—and its relatively large weight within the index of just under 14%. Similarly, banks were a standout due to a 58.6% return and the industry’s 15.6% weighting in the micro-cap index. In both industries, gains were spread across several companies.
Within Information technology, software made the biggest positive impact (even as many software companies have struggled with the idea that AI will render them obsolete), followed by meaningful contributions from semiconductors & semiconductor equipment, electronic equipment instruments & components and communications equipment.
Plenty of Micro-Cap Opportunities Remain
Yet even in the context of recent market leadership and widespread positive performance, we are still finding attractive buying opportunities in nearly every corner of the micro-cap universe—which brings us to the two other reasons underlining our long-term confidence.
The first centers on relative valuations. Based on our preferred index valuation metric, enterprise value over earnings before interest & taxes or EV/EBIT, micro-caps as a group remain close to a 25-year low versus large-cap stocks at the end of June.
The third element is earnings—which, as we often say, are what drives long-term performance for equities. Earnings fundamentals continue to improve for many small- and micro-cap companies. To be sure, consensus estimates are pointing to faster earnings growth ahead (as has been the case for the last several months). ). Yet even as earnings for micro-cap companies have been robust so far in 2026, the price-to-earnings (P/E) (excluding companies with negative earnings) and price-to-book (P/B) ratios for the Russell Microcap remained quite reasonable at the end of June, coming in at 16.6x and 2.2x, respectively. In both cases, they were also much lower than the same metrics in the Russell 1000 Index: the large-cap index’s P/E ratio (excluding companies with negative earnings) was 25.8x at then end of June, and the P/B was 5.3x.
Based on this data, as well as the fundamental and operational strengths we see in many companies, the small- and micro-cap leadership cycles looks like it’s just getting started.
Index Definitions
Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
The Russell 1000 Index is an unmanaged, capitalization-weighted index of domestic large-cap stocks. It measures the performance of the 1,000 largest publicly traded US companies in the Russell 3000 Index.
The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded US companies in the Russell 3000 Index.
The Russell Microcap Index measures the performance of the microcap segment of the US equity market. Microcap stocks make up less than 3% of the US equity market (by market cap) and consist of the smallest 1,000 securities in the small-cap Russell 2000® Index, plus the next smallest eligible securities by market cap.
The Russell Top 50 Mega Cap Index measures the performance of the 50 largest companies in the US equity market, capturing dominant mega-cap corporations spanning key sectors like technology, consumer discretionary, and health care.
WHAT ARE THE RISKS?
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Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
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