Small-cap stocks, as measured by the Russell 2000 Index, are expected to see modest gains in the first half of 2026, with upside likely constrained by interest rate pressures, according to JPMorgan analysts.
The bank noted that the Russell 2000 has struggled to outperform over the past several years and has effectively traded in a broad range since 2021.
In 2025, the index moved across the full span of that range, rebounding from its April low near 1,633–1,740, a key long-term support area, before stalling near the 2,458–2,466 peaks set during 2021–2024.
“Under our base-case scenario, we believe the index will hold above 2,232–2,235 support, which includes the September–November pattern objective and the April 2024 38.2% retracement,” the bank said.
However, JPMorgan cautioned that early 2026 gains could be limited, with targets ranging from 2,576 in December 2025 to 2,628 by midyear. Analysts cited rising bearish pressure in the belly to long-end of the Treasury market as a headwind for rate-sensitive small caps, even if the broader market maintains a risk-on trend.
The bank also highlighted a downside scenario if recession risks emerge. In such a case, the index could retest the October 2023 channel at 1,783–1,819 and revisit its long-term support near 1,633–1,740.
“The Russell 2000 has a well-rehearsed script to follow if recession risk moves to the forefront,” JPMorgan said, pointing to 2,042 as the next major support level in a downturn scenario.
The comments suggest that while small-cap equities may continue to participate in broader market gains, investors should remain cautious of limited upside and potential downside risks tied to economic growth and interest rates.