US small-cap stocks are enjoying their best returns in over 20 years, with the Russell 2000 up 20 per cent year‑to‑date versus a 10 % rise in the S&P 500 and less than 3 % for the Magnificent Seven megacaps. Investors are rotating away from big tech toward cheaper names that benefit from the AI investment boom.

Hyperscalers Amazon, Meta, Microsoft and Alphabet plan to spend $725bn on AI infrastructure this year, a 77 % jump from 2025. Tax relief from the One Big Beautiful Bill and corporate tax cuts have supported the economy, lifting small caps across sectors. Standout performers include Ichor Holdings, Ultra Clean Holdings and Rackspace Technology, whose shares have more than quadrupled.

However, analysts warn the rally is fueled by loss‑making tech firms, dubbing it “the tech trade on steroids.” The Russell Microcap index, where over half the constituents are unprofitable, has risen 25 %. The breadth of the advance may prove fragile if profit expectations disappoint.