Smaller US companies have roared back. From April 2025 through March 2026, the Russell 2000—an index that tracks roughly 2,000 small companies—gained 43.7%, according to ProShares. That beat the S&P 500 by more than 11 percentage points. For a group of stocks that has been left behind for the better part of a decade, this is a big deal.

The strength showed up consistently. Fidelity Institutional confirmed small-caps won over the past year and in the first three months of 2026. Even tinier companies did even better. The Russell Microcap index—the smallest tier—gained 45.8% in the 12 months ended March 2026, per Franklin Templeton.

Why They Were Stuck for So Long

Small-cap stocks spent over a decade in the shadows. The S&P 500 beat them by 69% between March 2021 and early 2025, per CME Group.

Two things pushed large companies ahead. First, during and after the pandemic, investors poured money into mega-cap tech stocks—the Apples and Microsofts of the world. Second, when the Federal Reserve started raising interest rates in 2022, it raised them faster than at any time in the previous 40 years. Small companies tend to carry more debt that adjusts with interest rates, so their borrowing costs shot up. That made them less attractive to investors.

What changed starting in April 2025 was not one new piece of good news. It was the end of those headwinds. Interest-rate expectations stabilized. The dollar, which had been strengthening, weakened. And small companies, which make most of their money selling to American customers, held their ground in a still-growing US economy.

A Hidden Problem in the Index

The stock gains are real. But look inside the Russell 2000 and there's a warning sign.

Only 61% of the companies in the Russell 2000 are currently profitable, per Aristotle Capital. That may sound okay until you compare it to history: back in 1994, about 85% of small-cap index companies made money. Nearly two out of every five companies in the index today are losing money.

Why? The Russell 2000 is not built to exclude losers. It includes startup biotech companies, money-losing tech disruptors, and companies that spend more cash than they bring in. Many of them were added when they went public, with no profit requirement. Over the decades, that has left the index with a weaker earnings foundation than ever before.

When an entire index gains 43.7%, you can't tell from that single number how much came from genuinely profitable companies growing steadily versus speculative bets being repriced higher versus damaged unprofitable companies just getting scooped up in the general rally. The headline index return hides all of that.

What Comes Next

Historically, the closest comparison is the 1994–1999 period, when small-cap earnings were healthier than they are now but small-caps still trailed the broader market for years. Today's index is weaker on that measure.

If interest rates stay elevated or if the US economy slows, unprofitable small-caps have a real problem: they need to borrow to stay alive, and borrowing costs are still painful compared to the pre-2022 era. A profitable small company can weather that. An unprofitable one is in a tougher spot.

This is why some investment managers buy a filtered version of small-cap stocks—ones where they deliberately exclude money-losing companies. That approach looks different from just buying the index and holding it. And that difference matters more today than it did 30 years ago, because the index now carries far more unprofitable companies.

The recent surge in small-cap stocks is real. So is the fact that nearly 40% of the index isn't making money. Both of those things are true at the same time, and they lead to genuinely different outcomes depending on which approach you choose.