Wall Street’s Quiet Winners: Small-Cap Stocks Steal the Spotlight From Big Tech

While investors have spent years obsessing over megacap technology names, a different corner of the market is suddenly stealing the show.

Smaller U.S. companies are delivering one of their strongest earnings seasons in years, and the performance is fueling growing conviction that the market’s recent rotation away from Big Tech still has room to run.

According to data compiled by Bloomberg Intelligence, about 65% of Russell 2000 companies have beaten fourth-quarter profit expectations so far—the highest beat rate since mid-2021. By contrast, the S&P 500’s earnings beat rate is at its lowest level in three quarters, highlighting a sharp divergence between small caps and their large-cap peers.

The earnings momentum hasn’t gone unnoticed on Wall Street.

Michael Wilson, chief equity strategist at Morgan Stanley, said small-cap stocks are enjoying their best revisions breadth since August, meaning more analysts are raising earnings estimates than cutting them.

“These developments are supportive of our small-cap relative preference amid a return of positive operating leverage,” Wilson wrote in a note.

For a group long viewed as fragile, the shift marks a notable change in tone.

Small caps have historically struggled in high-rate environments due to thinner margins and heavier debt burdens. But the backdrop has changed. As the Federal Reserve cuts interest rates and the U.S. economy continues to sidestep recession fears, those same companies are finding their footing.

Shares have responded accordingly. The Russell 2000 is outperforming the S&P 500 by more than six percentage points this year, putting it on track for its strongest relative performance in a decade.

At the same time, investors are growing increasingly uneasy about the payoff from massive spending on artificial intelligence. The Nasdaq 100 slid as much as 4.3% last week before staging a mild rebound, while sectors seen as vulnerable to AI disruption have been hit particularly hard.

For many strategists, the shift signals something bigger than a temporary trade.

“The market isn’t just going to be reliant on a small group of large tech companies,” said Gary Paulin, chief investment strategist at Northern Trust Asset Management. “It can broaden to other stocks in other sectors which are driven by the economy.”

That broadening is already visible in earnings reactions.

Viavi Solutions surged 18% after posting stronger-than-expected results, while Synaptics jumped on an upbeat outlook. By contrast, S&P 500 companies now face a much higher bar to impress investors—another sign that leadership is rotating.

At RBC Capital Markets, strategist Lori Calvasina noted that Russell 2000 companies are enjoying stronger earnings revision trends than large caps, suggesting the S&P 500’s long-standing dominance may be fading—at least for now.

Still, she cautioned that small caps will need to sustain profit growth to keep the momentum alive, especially as valuations rise and uncertainty lingers around how much further the Fed can cut rates.

“The good news for small caps,” Calvasina said, “is that a number of earnings-related data points we track are looking better.”

After years in Big Tech’s shadow, small-cap stocks are finally getting their moment—and this time, the rally is being driven by earnings, not hype.

If economic resilience holds and profits continue to surprise, Wall Street’s quiet winners may remain front and center—long after the AI buzz fades from the headlines.