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Small Caps Beat S&P 500 to Start 2026: Winning ETFs in Focus
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Key Takeaways
Small-cap stocks are outperforming large caps in early 2026 amid macro uncertainty.
Domestic focus and dollar strength are supporting small-cap relative performance.
Improving earnings outlook and attractive forward valuations boost small-cap ETFs.
Wall Street has delivered a moderate performance so far this year (as of Feb. 6, 2026). The S&P 500 has gained 1.1%, the Dow Jones has added 3.6%, and the Nasdaq Composite has lost 0.9%. However, the small-cap index Russell 2000 has jumped 6.5% and State Street SPDR Portfolio S&P 600 Small Cap ETFSPSM surged 8.7% so far this year. This shows that small caps are outdoing their larger peers to start 2026. Let’s find out why.
Volatile Macro Backdrop
Important events that have shaped the year-to-date market performance in the investing world are heightened geopolitical tensions, the rebound in the U.S. dollar, a roller-coaster ride of precious metals, winter storm Fern and its impact on natural gas prices, and President Trump’s announcement of former Fed governor Kevin Warsh’s nomination as the next Fed chair.
Geopolitical Tensions
Geopolitical worries rose at the start of the year following the U.S. move to oust and capture Venezuelan leader Nicolas Maduro. Moreover, Trump indicated that he was considering potential actions on Iran, while threatening to take Greenland and questioning the value of the NATO alliance. These remarks added to market unease.
President Donald Trump threatened new protectionist measures against Europe over the “Greenland row,” but later eased trade war fears after announcing an Arctic security framework deal at Davos.
Meanwhile, Iran reaffirmed its stance against ending nuclear fuel enrichment in Friday’s discussions with senior U.S. officials, while both parties signaled openness to ongoing diplomacy aimed at averting a possible U.S. military action. Rising geopolitical tensions are great for small-cap investing as these pint-sized stocks mainly have a domestic focus.
A Roller-Coaster Ride for the U.S. Dollar
The dollar strengthened following the nomination of Warsh, who is viewed as a hawkish central banker. Invesco DB US Dollar Index Bullish Fund(UUP) is off 0.4% this year (as of Feb. 6, 2026) while the ETF has gained 0.2% past week. Any strength in the greenback is good for smaller-cap stocks, as they have less foreign exposure and don’t have to bear the brunt of negative currency translations.
Positive Earnings Momentum
U.S. small-cap earnings are showing signs of a rebound. After logging negative earnings growth of 5% and 11.8% in 2024 and 2023, respectively, the S&P 600 index is expected to record 12.7% positive earnings growth in 2025. The index is expected to see steady earnings growth of 10.7% and 14.7% in 2026 and 2027, respectively, per the Earnings Trends issued on Feb. 4, 2026.
What Does Small-Cap Stock Valuation Say?
The Russell 2000 currently trades at a P/E (trailing 12-month) multiple of 36.56X, according to WSJ. However, the index trades at a forward P/E of 23.25X, which point to the undervaluation of the small-cap index and earnings growth potential. The forward P/E of the Nasdaq 100 is 24.69, higher than the Russell 2000.
Winning Small-Cap ETFs in Focus
Here are a few small-cap U.S. ETFs that have been in great momentum currently.
Invesco S&P SmallCap 600 Revenue ETF (RWJ - Free Report) – Up 11.6% so far this year (as of Feb. 6, 2026).
Pacer US Small Cap Cash Cows Growth Leaders ETF (CAFG - Free Report) – Up 9.4%
John Hancock Multifactor Small Cap ETF (JHSC - Free Report) – Up 8.9%
Invesco S&P SmallCap 600 Pure Growth ETF (RZG - Free Report) – Up 8.5%
View the Zacks #1 Rank List
Image: Bigstock
Small Caps Beat S&P 500 to Start 2026: Winning ETFs in Focus
Key Takeaways
Wall Street has delivered a moderate performance so far this year (as of Feb. 6, 2026). The S&P 500 has gained 1.1%, the Dow Jones has added 3.6%, and the Nasdaq Composite has lost 0.9%. However, the small-cap index Russell 2000 has jumped 6.5% and State Street SPDR Portfolio S&P 600 Small Cap ETF SPSM surged 8.7% so far this year. This shows that small caps are outdoing their larger peers to start 2026. Let’s find out why.
Volatile Macro Backdrop
Important events that have shaped the year-to-date market performance in the investing world are heightened geopolitical tensions, the rebound in the U.S. dollar, a roller-coaster ride of precious metals, winter storm Fern and its impact on natural gas prices, and President Trump’s announcement of former Fed governor Kevin Warsh’s nomination as the next Fed chair.
Geopolitical Tensions
Geopolitical worries rose at the start of the year following the U.S. move to oust and capture Venezuelan leader Nicolas Maduro. Moreover, Trump indicated that he was considering potential actions on Iran, while threatening to take Greenland and questioning the value of the NATO alliance. These remarks added to market unease.
President Donald Trump threatened new protectionist measures against Europe over the “Greenland row,” but later eased trade war fears after announcing an Arctic security framework deal at Davos.
Meanwhile, Iran reaffirmed its stance against ending nuclear fuel enrichment in Friday’s discussions with senior U.S. officials, while both parties signaled openness to ongoing diplomacy aimed at averting a possible U.S. military action. Rising geopolitical tensions are great for small-cap investing as these pint-sized stocks mainly have a domestic focus.
A Roller-Coaster Ride for the U.S. Dollar
The dollar strengthened following the nomination of Warsh, who is viewed as a hawkish central banker. Invesco DB US Dollar Index Bullish Fund (UUP) is off 0.4% this year (as of Feb. 6, 2026) while the ETF has gained 0.2% past week. Any strength in the greenback is good for smaller-cap stocks, as they have less foreign exposure and don’t have to bear the brunt of negative currency translations.
Positive Earnings Momentum
U.S. small-cap earnings are showing signs of a rebound. After logging negative earnings growth of 5% and 11.8% in 2024 and 2023, respectively, the S&P 600 index is expected to record 12.7% positive earnings growth in 2025. The index is expected to see steady earnings growth of 10.7% and 14.7% in 2026 and 2027, respectively, per the Earnings Trends issued on Feb. 4, 2026.
What Does Small-Cap Stock Valuation Say?
The Russell 2000 currently trades at a P/E (trailing 12-month) multiple of 36.56X, according to WSJ. However, the index trades at a forward P/E of 23.25X, which point to the undervaluation of the small-cap index and earnings growth potential. The forward P/E of the Nasdaq 100 is 24.69, higher than the Russell 2000.
Winning Small-Cap ETFs in Focus
Here are a few small-cap U.S. ETFs that have been in great momentum currently.
Invesco S&P SmallCap 600 Revenue ETF (RWJ - Free Report) – Up 11.6% so far this year (as of Feb. 6, 2026).
Pacer US Small Cap Cash Cows Growth Leaders ETF (CAFG - Free Report) – Up 9.4%
John Hancock Multifactor Small Cap ETF (JHSC - Free Report) – Up 8.9%
Invesco S&P SmallCap 600 Pure Growth ETF (RZG - Free Report) – Up 8.5%
iShares S&P Small-Cap 600 Growth ETF (IJT - Free Report) – Up 7.2%