The Russell 2000 has produced one of its strongest stretches since the COVID rebound, delivering a 23% gain in the first half of 2026 and a 41% increase over the trailing 12 months. But Goldman Sachs cautions that the momentum may be harder to sustain in the second half of the year.
In a client note, analyst Ben Snider identified the AI trade as a central force behind recent small-cap strength, estimating that AI infrastructure names accounted for roughly 40% of the Russell 2000's year-to-date return. That contribution was amplified by the fact that the largest mega-cap technology group, the so-called Magnificent Seven, produced a 0% return in the first half of 2026, meaning small caps avoided a contemporaneous drag from those stocks.
Goldman also highlighted other supports for the small-cap rally. A broadly healthy economic backdrop and a surge in healthcare mergers and acquisitions helped lift returns across many smaller companies, with biotechnology alone contributing about 10% of the Russell 2000's year-to-date gain. Overall, Russell 2000 stocks outperformed S&P 500 companies in nine of eleven sectors year-to-date, the note said.
However, the firm underscored that recent index mechanics changed the composition of the benchmark. Last week's Russell 2000 reconstitution lowered the weight of AI infrastructure stocks in the index from 15% to 7%, removing several of the largest contributors to the year-to-date performance.
On fundamentals, analysts model 48% earnings-per-share growth for the Russell 2000 in 2026, compared with a 24% projection for the S&P 500. Despite that gap, Goldman pointed out that consensus 2026 EPS estimates for the Russell 2000 have been trimmed by 9% year-to-date, and that rising valuations have explained roughly half of the small-cap rally so far.
Looking ahead, Goldman projects that the mix of elevated valuations alongside near-trend economic growth points toward low single-digit returns for the Russell 2000 over the next 12 months. The firm flagged a hawkish Federal Reserve as a particular downside risk, noting that nearly 30% of Russell 2000 constituents are unprofitable and that 29% of their debt is on a floating-rate basis.
Bottom line: AI infrastructure exposure and healthcare M&A have been major contributors to the Russell 2000's strong performance in 2026, but a recent index reconstitution, valuation expansion and balance-sheet vulnerabilities mean expectations for the rest of the year are more muted, according to Goldman Sachs.