Small-cap Companies Draw Market Attention: What Experts are Predicting

The Russell Index Gains Momentum
The Russell 2000 is breaking strongly to the upside, with the upper part of the channel remaining significantly higher.

No Warning Signs for Small Caps
The index is decoupling from the technology sector, and the recent sessions show a rare and decisive divergence in performance.

Will It Break Through?
The market is watching whether the Russell/NDX ratio will break above the downward trendline.

Fear Is Fading in the Russell
Russell volatility, measured by the RVX, closed at its lowest levels since March. This has not yet happened for tech stocks, measured by the VXN.

The Accurate Forecast
Morgan Stanley is receiving recognition for its latest bullish call on small-cap companies. Their logic is based on a contrarian view that the market is entering an early phase of the economic cycle following the so-called “rolling recession” of 2022–2025.

Four factors they believe will support stronger performance for small caps:
– Lighter cost structures enabling greater operating leverage
– Pent-up demand and improved pricing power
– Historically strong expansion in earnings revisions
– A Federal Reserve that is already moving toward interest-rate cuts

According to the analysis, small-cap earnings have already begun to turn upward. Net income growth for the average Russell 2000 company reached its strongest level in four years during the third quarter.

Operating Leverage
Small-cap companies remain sensitive to two key factors:

1. The positive impact of operating leverage
2. Labor costs, which directly affect corporate cost structures

Morgan Stanley concludes that small-cap companies will be in a unique position to deliver substantial and above-trend earnings per share growth in 2026 — both in absolute terms and relative to large-cap companies.

Retail Investors Avoid the Russell
Current fund flows are moving into the NDX and out of the Russell. According to the analysis, this flow should likely be the opposite, as the potential for small caps to catch up remains significant.