As geopolitical tensions in Iran and stagflation fears drag broader U.S. markets into the red, small-cap stocks are showing surprising resilience, leaving market experts sharply divided on what comes next.
A Striking Market Divergence
Despite the specter of war and rising crude oil prices, the iShares Russell 2000 ETF (NYSE:IWM) has managed to stay in the green, posting a 1.31% year-to-date gain.
In stark contrast, the broader markets have stumbled out of the gate in 2026. The S&P 500 index has declined 4.02% YTD, the Nasdaq Composite is down 5.84%, and the Dow Jones has tumbled 3.88%. The overall data reflects a market leaning on the domestic strength of small-cap equities to weather the geopolitical storm.
The Bull Case: A ‘Massive Surge’
Louis Navellier, founder and chief investment officer of Navellier & Associates, believes the macroeconomic shockwaves are actually a catalyst for small-cap outperformance.
“The Iran war is setting the stock market up for a massive surge, since the uncertainty in the world is being eliminated,” Navellier explained. He noted that the current inflation shock is not hindering small-cap stocks, which inherently benefit from a stronger U.S. economy.
“My small-cap stocks remain a bargain compared to large capitalization stocks in the S&P 500,” he added, emphasizing that an earnings recession is nowhere in sight. “I expect that the fundamentally superior stocks will continue to rebound strongly since good stocks bounce like fresh tennis balls.”
Cautious View: A ‘Prolonged Pause’
Conversely, John Murillo, Chief Business Officer of B2BROKER, warns that elevated oil prices and persistent inflation are forcing a harsh market recalibration.
“Higher energy prices introduced a stagflationary picture, while the Fed… appears in no rush to ease,” Murillo stated, warning that “higher for longer” rates disproportionately squeeze small caps due to their reliance on external financing and thinner margins.
While Murillo doesn’t believe the small-cap catch-up narrative is entirely invalidated, he views the current market as a “prolonged pause rather than a structural derailment.” He concluded, “The anticipated payoff now depends more on the trajectory of oil prices and the Fed's confidence in disinflation.”
IWM Gains 24% Over The Year
The IWM ETF has a 52-week range of $171.73 to $271.60, trading around $250 to $251, as of Thursday’s close. It was up 24% over the year, 2.98% over the last six months. Mirroring this, the Russell 2000 index was also up 1.18% YTD, 2.91% in six months, and 23.70% over the year.
The SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq 100 indices, respectively, closed higher on Thursday. The SPY was up 0.090% at $655.83, while the QQQ advanced 0.11% to $584.98.
Meanwhile, Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), fell 0.090% to close at $465.06 on Thursday.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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