Small Caps Are Beating the S&P 500 -- But 40% of Russell 2000 Companies Earn Nothing

Small-cap stocks are rallying, yet the Russell 2000 presents a mixed picture. Through May 2026, it was up 17.7% year-to-date, outpacing the S&P 500's 9.9% gain. However, profitability is weak, with about 40% of Russell 2000 companies producing no earnings, up from 17% two decades ago, according to Morningstar cited by Wells Fargo. Analysts warn the rally may mask underlying weaknesses as consensus earnings forecasts for the Russell 2000 fell 7% in the first five months of 2026, while S&P 500 forecasts rose 8%. Also, return on equity remained sub-1% over the prior 12 months, highlighting risk from Fed policy sensitivity.