Small-cap stocks are beating large-cap peers every trading day this year, setting up the longest winning streak against the S&P 500 since 1996. This persistent outperformance marks a stark reversal from 2023, when higher interest rates punished smaller firms with greater debt sensitivity.

The trend signals a shift in investor appetite, with market participants rotating into domestic-focused companies that benefit from a resilient U.S. economy. This move reflects fading fears of a recession and bets that smaller firms will gain more from any economic acceleration than their global, multinational counterparts.

What to watch is whether this leadership rotation can sustain. The Russell 2000 index remains well below its 2021 peak, suggesting room for catch-up if earnings growth materializes. Investors will parse upcoming economic data for confirmation that the domestic recovery is solid enough to keep capital flowing to smaller stocks.