The US Small-Cap Bull Market: A Correction, Not a Conclusion

The recent decline in US small-caps is more likely a correction within an emerging bull-market cycle than the end of their advance.

• From the April 8, 2025 market low through September 30, the Russell 2000 gained 61.9%, versus 55.5% for the Russell 1000.
• The Russell 2000 subsequently fell more than 11% from its mid-August high, reaching a recent low on October 19, even as large-cap indexes reached new records in early October.
• Between 2002 and 2025, the Russell 2000 suffered an average intra-year decline of 19.6% while still delivering an average calendar-year return of 10.2%, showing that substantial drawdowns can occur during rewarding years.
• During one week in October, the Nasdaq Composite fell more than 2.5% while the Russell 2000 rose; since January 1979, this combination occurred on only five trading days, or approximately 0.04% of sessions, with four instances between April 1999 and March 2001.
• Royce argues that accelerating earnings, attractive relative valuations and low expectations could support sustained outperformance, particularly among small-caps with strong balance sheets, consistent profitability and disciplined capital allocation.

Takeaway: Long-term investors should view the pullback as a possible volatility phase within a durable small-cap leadership cycle, while recognizing that economic uncertainty, changing rate expectations and market volatility could still interrupt or reverse the advance.