In the age of artificial intelligence, tech giants with record-breaking market share continue to dominate the headlines – all while companies half their size are quietly posting better performance.
Market capitalization is a measure of the total number of shares issued by companies. And so far in 2026, micro caps – those with a market capitalization of less than $300 million – have doubled the returns of the 500 largest companies in the United States.
In May, the index tracking those small companies hit an all-time high. For investors looking to gain exposure and diversify with these under-the-radar stocks, here’s what you need to know.
David and Goliath: the beginning of the market
Mega caps stocks are well publicized. They have a great influence on the markets, and their performance is often tied directly to the economy as a whole. Although the numbers can vary, mega caps often boast a market capitalization of more than $200 billion.
That’s just the basics. There are currently 11 companies listed in the US whose market capitalization exceeds 1 trillion, with Nvidia – the world’s largest publicly traded company – valued at $5.36 trillion. In other words, Nvidia’s value is greater than the GDP of every country in the world except the US, China and Germany.
The S&P 500 consists of mega caps and large caps (companies with valuations from $10 billion to $200 billion). In contrast, the Russell Microcap Index tracks the performance of the smallest 1,000 companies in the Russell 2000 (an index of the smallest 2,000 companies in the Russell 3000, which is itself an index of the entire US stock market), and up to 1,000 additional small companies.
This year, the Russell Microcap Index has gained 17.55%, compared to a year-to-date gain for the S&P 500 of 8.72%.
Small caps are protected from currency and concentration risks
Because they have grown so large, mega caps dominate the S&P 500. Today, the top 10 companies in that index account for about 40% of its weight, meaning that investors who own the financial stocks that track the S&P 500 allocate 40 cents for every $1 to just 10 of the index’s 500 companies.
That presents a serious risk of concentration. When these mega-cap companies see big gains and losses, it can have a big impact on the underlying indices.
Last October, a significant selloff that dragged down the mega caps was placed in the first half of 2026. That technical decline led to the Nasdaq going into a brief correction, which was directly caused by the heavy losses of members of the Magnificent Seven and leading software stocks., and a broader flight to safety as investors look to avoid further downside risk.
That market shift has helped micro caps outperform major domestic indexes for four consecutive quarters, according to investment management firm Franklin Templeton. Last year, the Russell Microcap Index gained more than 57%; the S&P 500 gained about 27%.
While the S&P 500 fared better in the second quarter of 2026, the downside risk remains. The index’s gains now reach six consecutive weeks. But only five companies – Nvidia, Micron, Apple, Advanced Micro Devices and Intel – made 75% of their profits last week.
As investors became increasingly wary of the prices of larger and larger stocks, the flight to safety didn’t just result in a technical exit and into the slow and steady S&P 500 sectors. It also saw significant inflows into small caps (companies with valuations of $250 million to $2 billion) and micro caps.
The performance of that group of stocks is expected to continue, as the market place is full of incentives for small companies. One tailwind is the limited international exposure of micro caps.
“Many smaller companies generate a large portion of their capital internally, reducing sensitivity to costs and slowing global growth,” Adam Turnquist, chief strategist at LPL Financial, writes in an email to Money.
According to Turnquist, micro caps are expected to return to earnings growth this year for the first time since 2021, with earnings forecast to increase significantly in 2027.
He notes that as of April 2025, charts comparing the Russell Microcap Index to the S&P 500 show a previous rally, with “continued improvement in relative strength. [suggesting] this practice may have another area to work on.”
Micro caps have major caveats
Research from Franklin Templeton shows that since 1978, when small stocks and micro-caps’ five-year returns were 5% or less – as they have been since 2021 – subsequent three- and five-year returns have been positive 100% of the time.
But for investors considering adding exposure to small caps, it’s important to understand that they are more volatile in nature than their large and large counterparts.
The S&P 500 represents the largest and most established publicly traded US companies. On the other hand, micro caps don’t have the competitive moats that companies like Nvidia and Walmart have established over the decades. That can lead to relative financial instability. It also makes micro caps more susceptible to headline risk, or the risk of news events having a negative impact on stock prices.
Liquidity is another problem. Small caps typically have very low floats (the number of shares available to the public to be bought and sold on the open market). That results in low daily trading volume, making those stocks highly illiquid. In the event that investors want to sell shares, there is no guarantee of a buyer.
Together, this makes micro caps a highly speculative investment. Investors should be aware of the risks before they allocate funds.
“Mega-cap stocks continue to dominate investor attention,” Turnquist said. “[But] The power of micro caps is not just a temporary development. “
