The "Great Rotation" isn't just a catchy headline anymore. It's actually happening. For years, anyone holding a basket of Russell 2000 companies felt like the person at the party who brought organic kale chips while everyone else was eating pizza. You were doing the "right" thing by diversifying into small caps, but you were watching your neighbor get rich off three or four massive tech stocks.
Honestly, it was brutal.
But as we sit here in January 2026, the script has flipped. The tech giants—the ones we all thought were invincible—are suddenly looking a bit winded. Meanwhile, the scrappy, domestically focused businesses that make up the Russell 2000 are having a moment.
What’s Driving the Surge in Russell 2000 Companies?
You've probably noticed your grocery bill is still high, but the Federal Reserve has been busy. They dropped three consecutive rate cuts in late 2025, bringing the federal funds rate down to the $3.50% - 3.75%$ range. For a massive company like Apple, that's fine, but for the average company in the Russell 2000, it's a total game-changer.
Most small-cap firms carry floating-rate debt. When rates are high, they bleed cash just to keep the lights on. Now that the Fed has pivoted, that pressure has evaporated.
There's also this piece of legislation everyone's calling the "One Big Beautiful Act" (OBBBA) that passed last July. It kept the corporate tax rate at $21%$ but, more importantly, it brought back 100% bonus depreciation. If you’re a small manufacturing company in Ohio and you want to buy new equipment, you can now write that whole thing off immediately. That has "unlocked" billions in domestic investment that used to just sit on the sidelines.
The New Heavy Hitters
It's funny how the names change. A couple of years ago, nobody was talking about Applied Digital (APLD) or Rocket Lab (RKLB) as serious portfolio anchors. Now? Applied Digital just dropped a blowout earnings report because they’ve successfully pivoted their Bitcoin infrastructure into high-demand GPU-as-a-Service for AI.
And then there's the biotech scene. Celcuity (CELC) and Cogent Biosciences (COGT) are up hundreds of percentage points. Why? Because they’re actually hitting their clinical trial milestones. In the Russell 2000, one good FDA approval doesn't just move the needle—it breaks the machine.
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Why the Reconstitution Matters More This Year
If you've been following the index for a while, you know about the "June Reconstitution." It's basically the one day a year when FTSE Russell kicks out the losers and brings in the new winners.
Well, things just got complicated.
Starting in 2026, they are moving to a semi-annual reconstitution. We’re still doing the big dance in June, but now there’s a second one scheduled for December. This is a huge deal for volatility. It means the index will stay much "fresher," but it also means we're going to see massive trading volumes twice a year instead of once.
- Rank Day (June): April 30, 2026
- New December Effective Date: Friday, December 11, 2026
If you’re trading these stocks, you have to circle these dates in red. The "drift" that used to happen between June and the following May—where a company would grow so big it didn't belong in a small-cap index anymore—is going to be much tighter now.
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The Valuation Gap Is Still Ridiculous
Even with the recent rally, small caps are still cheap. Like, "store-brand cereal" cheap.
As of mid-January 2026, the Russell 2000 is trading at a price-to-earnings (P/E) ratio of about $18.11$. Compare that to the S&P 500, which is still hovering near $22\times$.
Historically, small caps have outperformed large caps by an average of $2.85%$ per year since 1927. We’ve just come off a 15-year stretch where that didn't happen—the longest anomaly in market history. Experts at Vanguard and Invesco are basically screaming from the rooftops that the "mean reversion" is finally here.
Sectors to Watch
- Financials: Regional banks are cleaning up. They’re benefiting from a steeper yield curve and a massive surge in mid-market M&A.
- Healthcare: Specifically precision oncology. Companies like Celcuity are finding new cancer subtypes that the big pharma guys missed.
- Industrials: The "reshoring" boom is real. As manufacturing moves back to the U.S., the companies making the parts are the ones in this index.
The Risks Nobody Mentions
I’m not going to sit here and tell you it’s all sunshine. Russell 2000 companies are notoriously volatile.
During a market correction, these stocks can drop $40%$ deeper than the big guys. They have lower liquidity, which is just a fancy way of saying that when everyone wants to sell at once, the door is very small.
Also, watch out for the "zombie" companies. Roughly $40%$ of the index still isn't actually profitable. If the economy hits a surprise snag or inflation ticks back up, those are the first companies that will hit the wall. You've gotta be picky.
How to Actually Play This
You don't need to go out and try to pick the next Archer Aviation (ACHR) or Joby Aviation (JOBY) by yourself. That's a great way to lose sleep.
Most people are just using ETFs. The iShares Russell 2000 ETF (IWM) is the big dog with over $68$ billion in assets, though the expense ratio is $0.19%$. If you're a cheapskate (like me), the Vanguard Russell 2000 ETF (VTWO) is a better bet at $0.10%$.
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Actionable Steps for Your Portfolio:
- Check Your Weighting: Most people are accidentally $95%$ in large-cap tech. Consider moving $10-15%$ into a small-cap value fund to catch the tail end of this rotation.
- Watch the Earnings: We are in the middle of the 25Q4 earnings season right now. Watch for revenue growth—if it’s above $4%$, the rally has legs.
- Mark the December Recon: Don't get caught off guard by the new semi-annual rebalancing schedule. Liquidity will get weird in early December.
The era of "Big Tech or bust" is fading. The companies in the Russell 2000 are finally getting their day in the sun, and for the first time in a decade, the "little guys" are the ones leading the charge.