For the first time in more than three years, investors are giving an extended look to areas of the market beyond tech. Energy and consumer staples are among the best-performing sectors this year. Value and dividend stocks have made a comeback. International equities have been on a tear since the beginning of 2025.
Another category that's had a strong start to the year is small caps. Long unloved and ignored, they're getting attention for their comparatively small exposure to tech and attractive valuations. The Russell 2000, a generally accepted benchmark for small caps, is receiving some eye-catching price targets from analysts.
The ETF Action database, which compiles price targets for companies within a particular ETF, currently has a 25% 12-month upside target for the Vanguard Russell 2000 ETF (VTWO 1.78%).
Let's break down the investment case for this fund heading into the remainder of 2026.
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Why Wall Street is turning bullish on small caps again
Even though small caps are considered riskier and have more boom/bust potential than large caps, there comes a point where the value and the narrative are impossible to ignore.
For example:
- Valuation concerns about megacaps, potential rate cuts, and a deregulation tailwind would all benefit small caps.
- Currently, the Russell 2000 is expected to grow 2026 earnings by 19% compared to a 13% growth forecast for the S&P 500.
- The Vanguard Russell 2000 ETF has a price/earnings (P/E) ratio of 18 versus 28 for the Vanguard S&P 500 ETF.
It's not often that the value and growth stories both line up for small caps, but that's happening now. And the market has begun to recognize it.
NASDAQ: VTWO
Key Data Points
Why the Vanguard Russell 2000 ETF is positioned for the next leg
Megacaps have dominated the U.S. equity market for years, but concentration risk is beginning to rise. The same "Magnificent Seven" stocks that have pulled the major market averages higher are all down year-to-date as of Feb. 13, and they're all down more than 10% from their all-time highs. Tech has become an anchor this year.
Small companies tend to disproportionately benefit from lower interest rates because many carry higher debt loads. Current rate-cut expectations are modest, but any unexpected disinflation, growth, or labor market shock could quickly have the Federal Reserve thinking about more rate cuts.
But if the U.S. economy can maintain a "soft landing" or "no landing" outcome, small caps could find additional momentum.
For years, investors were interested only in the growth stories being offered by large-cap and megacap stocks. The next phase of the market cycle could finally reward the small caps.
