The Russell 2000 index is beating the market. By a wide margin. Through late May 2026, the benchmark for U.S. small-cap equities had gained 17.7% year-to-date, compared with 9.9% for the S&P 500.
On the surface, that looks like the long-awaited small-cap renaissance that strategists have been forecasting for years. Valuations relative to large-caps sit at levels not seen in a quarter-century. Rate cuts, rotation trades, and domestic growth narratives are all pointing in the same direction. But beneath the headline return, a structural problem has been building for two decades, and it changes the calculus for investors who buy the index without looking at what is inside it.
