U.S. small caps are outpacing the S&P 500 by the widest annual margin since 2003, a divergence that has quietly taken hold while Wall Street fixated on a handful of stumbling megacaps.
The iShares Russell 2000 ETF (NYSE:IWM) has climbed 20% year-to-date through the end of June, roughly 11 percentage points ahead of the SPDR S&P 500 ETF Trust (NYSE:SPY).
The last time small caps led by this much, “In da Club” topped the charts, Facebook did not exist and the iPhone was four years away.
Here is what is behind the divergence.
SPX Dragged Down By Hyperscalers And Software Names
Looking at year-to-date contribution to the S&P 500, two clusters of stocks have put the brakes on the index.
The first is the hyperscalers.
Microsoft (NASDAQ: MSFT), Meta Platforms (NASDAQ: META) and Oracle (NYSE: ORCL) are all negative year-to-date as investors reassess the soaring capital expenditure behind the AI buildout and question how quickly that spending turns into profit.
Microsoft has fallen more than 20% from where it began the year, weighed down by a multibillion-dollar quarterly capex ramp. Oracle just logged 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 cluster is software. Application and SaaS names have been pressured by fears that AI agents could disrupt the traditional subscription model — a worry that intensified after new agentic tools arrived from AI labs earlier in the year.
The second is software, where fears of artificial-intelligence disruption — the worry that AI tools could erode demand for traditional software — have gutted former leaders. Palantir Technologies Inc. (NASDAQ:PLTR), Intuit Inc. (NASDAQ:INTU), Accenture plc (NYSE:ACN) and Salesforce Inc. (NYSE:CRM) have each shed between 34% and 58% this year.
A handful of names, in other words, are doing the damage.
| Stock name | Sector | YTD Return | Contribution to index performance (bp) |
| Microsoft Corp. | Information Technology | -21.84% | -127 |
| Meta Platforms, Inc. | Communication Services | -13.99% | -34 |
| Tesla, Inc. (NASDAQ: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 |
Russell Benefited From Heavier Participation In The Rally
The Russell 2000’s gains tell the opposite story. They were spread across the index rather than concentrated in a few names.
Of 1,863 constituents measured, 1,209, or 64.9%, posted a positive return. Some 995, or 53.4%, gained more than 10%. A further 636, or 34.1%, rose more than 25%, and 102, or 5.5%, more than doubled.
The three largest positive contributors were Bloom Energy Corporation (NYSE:BE), up about 211%, Sterling Infrastructure, Inc. (NASDAQ:STRL), up about 165%, and Credo Technology Group Holding Ltd. (NASDAQ:CRDO), up about 60%, all tied to the AI data center buildout.
Yet their combined contribution to the index came to just 274 basis points.
All three of the Russell’s top contributors are now leaving the index. In the June 2026 reconstitution, Bloom Energy — which had 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.
Best Contributors To The Russell 2000’s YTD Performance
| Company | SECTOR | YTD Return | Contribution to index performance (bp) |
| Bloom Energy Corporation | Industrials | +211.06% | +160 |
| Sterling Infrastructure, Inc. | Industrials | +165.25% | +57 |
| Credo Technology Group Holding Ltd. | Information Technology | +59.74% | +57 |
| TTM Technologies, Inc. (NASDAQ:TTNI) | Information Technology | +157.38% | +46 |
| Semtech Corporation (NASDAQ:SMTC) | Information Technology | +101.53% | +27 |
| DigitalOcean Holdings, Inc. (NYSE:DOCN) | Information Technology | +193.71% | +25 |
| SiTime Corporation (NASDAQ:SITM) | Information Technology | +89.51% | +25 |
| Viavi Solutions Inc. (NASDAQ:VIAV) | Information Technology | +157.18% | +25 |
| Modine Manufacturing Company (NYSE:MOD) | Industrials | +89.31% | +25 |
| Hut 8 Corp. (NASDAQ:HUT) | Information Technology | +154.30% | +24 |
Why It Matters
So far 2026 hasn’t been a rotation out of the AI trade — it’s been a rotation within it, away from the megacap spenders punished for their capex and toward the smaller suppliers selling the picks and shovels.
The takeaway is that the small-cap advance has been powered by breadth rather than a handful of high flyers. the opposite of the narrow, mega-cap-driven move that has defined the S&P 500 for years.
Photo: Shutterstock
