Small-Cap Stocks Hit New Highs, Poised to Extend Gains Into Year-End

Small-cap stocks are showing renewed strength, suggesting a profitable setup for investors heading into year-end.

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The Russell 2000 index notched a new record high on Wednesday, marking its fifth all-time high of 2025. Technical analysts say this could be just the beginning. Katie Stockton, founder of Fairlead Strategies, noted that the index is on the verge of breaking through its final resistance near 2,466, having already climbed above its 200-day moving average back in September. Just last month, it also topped its previous peak from November 2021 a milestone that further reinforces bullish momentum.

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For a market segment that’s spent years lagging behind large caps, these are encouraging signs. Now, optimism is starting to build on Wall Street that small caps could finally take the lead particularly as investors grow cautious about potential pullbacks in mega-cap technology names.

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“I don’t see this shift as purely a reaction to weaker momentum,” Stockton. “It’s more about fading confidence in the dominant leadership of large-cap tech, including some of the biggest names in the sector.”

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Stockton, who remains short-term bearish on the S&P 500, warned that the broader market may be due for a meaningful correction in the weeks ahead.

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“This should be a key consideration for investors heavily concentrated in large-cap tech,” she said. “It might be time to rethink portfolio allocations not only to manage risk but also to capitalize on a potential breakout in the Russell 2000. A sustained move above 2,460, confirmed by two consecutive weekly closes, would mark a major long-term bullish development.”

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By Wednesday afternoon, the Russell 2000 was up 0.8%, doubling the gain seen in the S&P 500, underscoring its growing relative strength.

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Why Small Caps Are Gaining Momentum

Part of the recent rally can be attributed to shifting Federal Reserve policy expectations. Smaller companies tend to benefit more directly from lower borrowing costs and stronger business cycles, making them more responsive to an environment of easing financial conditions.

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With the U.S. economy continuing to show resilience, the start of a Fed rate-cutting cycle has sparked renewed enthusiasm for small caps. Comments from Fed Chair Jerome Powell on Tuesday added fuel to the rally, as he suggested that the central bank’s balance sheet reduction or quantitative tightening could end sooner than expected.

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That message gave investors another reason to rotate into smaller names, which are typically more interest-rate sensitive than their large-cap counterparts.

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Still, not everyone is convinced that this segment’s comeback will last. Adam Parker, founder of Trivector Research, recently described small caps as a “structurally inferior” asset class, arguing that they tend to lean more toward value stocks and generally have lower profit margins than larger peers.

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And while small caps have plenty of bright spots, there are also pockets of froth emerging. Sectors tied to cryptocurrency, clean energy, quantum computing, and small-scale nuclear power have been among the biggest gainers within the Russell 2000, raising concerns about speculative excess.

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Despite the risks, several strategists remain upbeat. Steven DeSanctis, U.S. small- and mid-cap strategist at Jefferies, believes the rally has room to run. He points to declining interest rates, an uptick in M&A activity (particularly beneficial for small-cap financials), and accelerating earnings growth as key catalysts that could support further gains.

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Even if small caps don’t dramatically outperform, DeSanctis expects them to outpace large caps through year-end. Jefferies’ year-end target for the Russell 2000 stands at 2,665, representing roughly 7% upside from Tuesday’s close. In comparison, the firm’s S&P 500 year-end forecast of 6,600 sits below current levels, implying limited room for further gains among large-cap stocks.

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“We don’t see much upside left in the large-cap space,” DeSanctis said. “But as we move down the market-cap spectrum, the opportunities become a lot more compelling.”

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After years of lagging performance, small caps are finally capturing investor attention. With improving technical signals, a friendlier Fed backdrop, and renewed enthusiasm for risk-taking, the stage is set for continued strength in the Russell 2000.

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If the index can confirm a breakout above long-term resistance, it may not only mark a turning point for small-cap stocks but also signal a broader rotation in market leadership one that could reward investors willing to look beyond the mega-cap names that have dominated much of the post-pandemic era.

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