Russell 2000 Slips Thursday After Its Best First Half Since 1991 as Chip Selloff Weighs on Small-Cap AI Names

NEW YORK — The Russell 2000 Index, which just completed the strongest first half of any year since 1991, closed Thursday with a modest decline of 0.55%, settling at 2,996.11 and finishing just below the psychologically significant 3,000-point level as the broad chip sector selloff that rattled the Nasdaq for a second consecutive session weighed on small-cap technology and semiconductor-adjacent names even as the Dow Jones Industrial Average hit a fresh all-time record.

The day's pullback for small-cap stocks came on the final trading session before the Fourth of July holiday weekend, with U.S. markets closing Friday in observance of Independence Day. The small decline capped a week that itself followed one of the most remarkable six-month stretches for American small-cap equities in a generation.

The Russell 2000 gained 22% in the first half of 2026, its best performance since 1991 and well above the S&P 500's 9.6% first-half advance. The rally also outpaced the Dow Jones Industrial Average's 8.9% gain and the Nasdaq's 12.8% climb, a reversal of the large-cap-heavy pattern that had defined much of the prior three years when megacap technology stocks captured nearly all of the headline performance.

"It's both a valuation catch-up story and a fundamental story," said Amy Zhang, portfolio manager at Alger. "The valuation gap was so wide that a truck can drive through it. At the same time, fundamentals are improving in small-caps and I think that's why it's causing the broadening trade."

Consensus forecasts for Russell 2000 companies' 2026 earnings growth have climbed to 38% from about 23% at the start of the year, according to LPL Financial, reflecting growing optimism that profit growth is broadening beyond the largest technology companies. Bottom-up analyst estimates suggest the Russell 2000 could deliver around 43% year-over-year earnings growth over the next 12 months, a figure that outpaces projections for the S&P 500 and has underpinned much of the institutional interest in the asset class through the first half of the year.

Semiconductor and semiconductor equipment companies were the biggest winners within the Russell 2000 during that period, underscoring how the artificial intelligence investment boom has rippled through the broader market well beyond the large-cap names that dominate most AI coverage. Chip-related companies accounted for 16 of the Russell 2000's 50 best-performing stocks in the first half of the year, including Aehr Test Systems, Ichor Holdings and MaxLinear, which all rallied more than 400%. Rather than competing directly with industry leaders like Nvidia, many of these smaller companies have benefited from rising demand across the AI supply chain, supplying testing equipment, materials, components and specialized subsystems.

Those same names, however, have shared in this week's semiconductor sector correction, which has wiped out meaningful short-term gains across the chip space broadly as investors who accumulated large positions during the sector's extraordinary first-half run have taken profits ahead of the holiday. The VanEck Semiconductor ETF fell 4.5% Thursday alone, and the Philadelphia Semiconductor Index has posted its worst two-day decline since early June, with many of the smaller, more speculative names in the sector experiencing even steeper percentage drops than the large-cap bellwethers.

Small cap stocks are having a moment, according to Schwab's market open report. The Russell 2000 gained 22% during the first half of the year, its best since 1991 and well above the S&P 500's 9.6% gain. The index also topped the S&P 500 for two consecutive quarters, the first time that had happened since 2021, a milestone that has attracted fresh institutional attention to the small-cap universe and driven significant inflows into small-cap focused exchange-traded funds throughout the year.

Despite Tuesday's chip-driven dip, broader small-cap market dynamics remain constructive for investors with a longer time horizon. The Russell 2000's composition spans financials, industrials, healthcare, energy, biotech and technology, a diversification that gives the index exposure to domestic economic strength across multiple sectors simultaneously. Small-cap stocks generate roughly 70 to 80 percent of their revenue domestically, making the index particularly sensitive to U.S. economic conditions and comparatively insulated from global trade tensions that have periodically complicated the earnings outlooks of larger multinationals.

Bank of America analyst Jill Carey Hall said in a recent note that the bank still sees upside opportunities within small caps for less rate-sensitive stocks, especially because Russell 2000 performance has been concentrated this year and the broader universe has room to participate more fully in the rally.

The Federal Reserve interest rate outlook remains the most consequential variable for the small-cap outlook heading into the second half of 2026. Higher borrowing costs pose a particular challenge for smaller companies, which generally carry more floating-rate debt and face greater refinancing needs than large-cap peers. Bank of America has estimated that every additional 25 basis point rate hike would reduce Russell 2000 operating earnings by approximately 2%, a meaningful sensitivity given that the Fed's next meeting is scheduled for July 28-29 and that some market participants had been pricing in the possibility of further tightening before this week's soft employment report shifted that calculus.

"This should allow the Fed to take a patient approach to any shift in its policy over the next few months, seeing how the incoming economic data comes in rather than rushing to a decision to hike," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research.

The June nonfarm payrolls report, which showed just 57,000 jobs added against expectations of 115,000, has provided the most direct macro support for small-cap stocks this week by reducing near-term rate hike fears, even as the soft headline reading raised fresh questions about whether economic momentum is slowing more quickly than the consensus had anticipated.

For now, Thursday's modest decline represents a pause in a larger story rather than a reversal, with the index barely off a recent all-time high reached on Wednesday of this week at 3,033.75 and well positioned, by most analysts' assessments, to resume its outperformance once the semiconductor profit-taking cycle runs its course and attention shifts back to the improving earnings trajectory across the small-cap universe heading into the second half of 2026.