Small Caps Stage Historic Rally
The small-cap Russell 2000 Index has been beating the S&P 500 for a 10th straight session—the longest such streak since 1990. This remarkable run signals a potential broadening of the market rally beyond the mega-cap technology stocks that dominated 2025.
U.S. stocks are starting 2026 in a similar fashion to 2025, with artificial intelligence stocks jumping while the broader market shows mixed performance. The divergence between small-cap and large-cap performance has caught the attention of market strategists who see opportunities outside the crowded mega-cap space.
Wall Street Bullish on 2026
Artificial intelligence stocks have played a central role in driving the stock market's rally over the past three years, and the trend is expected to continue in 2026. Wall Street projections suggest the S&P 500 will head higher this year on the back of robust AI infrastructure spending.
Asset management company DWS anticipates that the S&P 500 will jump to 7,500 points by year-end, while Deutsche Bank has an even rosier forecast, expecting the index to reach 8,000 points by the end of 2026, citing AI as a key catalyst.
AI Infrastructure Spending Accelerates
Artificial intelligence is no longer a narrow technology trade—it is reshaping energy markets, infrastructure spending, and portfolio construction. Some of the trends driving the market are tied to AI's physical requirements, as power, cooling, grid stability, and data center efficiency have become binding constraints.
According to Goldman Sachs, leading data center operators are estimated to spend more than $500 billion on capital expenditures in 2026. Research from McKinsey shows that data centers may require $7 trillion to meet demand for compute power by 2030.
Small Cap AI Winners
Several smaller AI-focused companies have posted significant gains to start 2026:
- Applied Digital (APLD): Already up about 50% in 2026, with revenue growth of 250% year over year driven by data center services for AI hyperscalers
- SoundHound AI (SOUN): Shares have jumped nearly 11% in 2026, with revenue growth exceeding 120% year over year
- Bloom Energy: Shares have surged over 500% since the company's fuel cells began being ordered for data centers, with market cap now above $30 billion
Energy and Infrastructure Beneficiaries
Small companies are rising quickly to rival Big Tech as AI's best trade, according to CNBC analysis. The power requirements for AI data centers have created opportunities for energy companies, utilities, and infrastructure providers that were previously overlooked by growth investors.
Investment Considerations
The rotation toward small caps and AI infrastructure stocks reflects a broadening of the AI investment theme. While large-cap technology stocks remain central to portfolios, investors are increasingly looking at the picks-and-shovels beneficiaries of the AI buildout.
Financial advisors caution that small-cap stocks carry higher volatility and risk compared to large-cap peers. Investors should consider their risk tolerance and time horizon before adjusting portfolio allocations.
Sources: CNBC, Bloomberg, The Motley Fool, Goldman Sachs Research