The Return of the Russell 2000 – Smaller Companies Compete with the Giants of the S&P 500 and Nasdaq

The Russell 2000, considered a barometer of the real US economy, reached its first record high in four years in September. Its gains contrast with the dominance of S & P 500 i Nasdaq, where the fate of the entire market is determined by a few tech giants. The question is whether the current breakout heralds a broader rotation towards small caps or just short-lived euphoria.

Russell 2000 Hits All-Time High in Mid-September

US stock indexes rose to new records yesterday, even as the US government entered its first shutdown in seven years. S & P 500 exceeded 6,700 points for the first time in history, and the Nasdaq 100 also ended the day at a high. The Russell 2000 set its record of 2,467.70 points on September 18 and has remained below that level since then. Yesterday, it gained 0,24%, closing the session at 2,442.35.

The September peak in the Russell index is the first such event since November 2021. It has a psychological dimension, signaling that investors are once again recognizing the potential of smaller and cyclical stocks. Furthermore, on the same day, all five major Wall Street indexes—the S&P 500, Nasdaq 100, Nasdaq Composite, Dow Jones, and Russell 2000—simultaneously set records, a feat last seen in 2021.

CHECK: Russell 2000 - how to invest in small US companies [Guide]

Recent years have been tough for small caps. In 2022, the Russell 2000 fell 21%, hurt by rising interest rates and tighter credit conditions. It then rebounded 15,1% in 2023 and 10% in 2024, but lagged far behind the S&P 500 and Nasdaq 100. Only 2025 brought a turnaround: the Russell has gained 9,5% year-to-date, almost as much as the broader market.

Do September's record highs herald a broader rotation towards small caps?

History shows that such synchronicities can signal a long-term trend, but they also often end in a brief episode of euphoria. The S&P 500's ratio against the Russell (SPX/RTY) currently shows the largest large-cap advantage since the 90s – a staggering 58%.

The Russell 2000 reflects the health of domestic companies dependent on credit and the cost of capital. It's supported by falling interest rates and better economic data – new unemployment claims in the US fell to 231, and consumer sentiment is improving. The index's composition also supports growth, as the ten largest companies account for only 4,9% of the total, with financial, industrial, and technology sectors leading the way. The contrast with the S&P 500 is stark: technology accounts for 33%, while the top ten companies account for a staggering 37,8%. In practice, market direction is often determined by companies like Nvidia.

Differences can also be seen in valuations

Russell is trading at 27,5 times projected earnings and 1,3 times sales – cheaper relative to revenue but more expensive relative to earnings, suggesting fragile margins. By comparison, the S&P 500 trades at 23,3 times earnings and 3,4 times sales, and the Nasdaq 100 trades at 28,5 times and 6,3 times, reflecting high expectations for big tech. It's no surprise that Russell reacts more vehemently to any move. FED, because with low margins the cost of money quickly becomes a key factor.

Summary

For now, the contrast remains stark, as on one side we have an index of global giants, focused on a few technology companies, and on the other, the fragmented Russell 2000, more cyclical and dependent on the health of the US economy. However, September's record highs show that there's a good chance the market is starting to look beyond Silicon Valley.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.