The Second-Worst Small-Cap Drought Is Over

Everything has been winning for much of 2025. But if you turn the clock back further, the "everything bull market" fades away.

Sure, the S&P 500 Index has soared since the market bottom in 2022. And it has been hitting new highs since early 2024.

But if you look at other assets – and even other corners of the U.S. market – all-time highs haven't started happening until more recently... if at all.

One of those areas is small-cap stocks. They hit an all-time high in November 2021. And nearly four years later, they still hadn't returned to that level... that is, until earlier this month.

The Russell 2000 Index broke out to a new all-time high on September 18. That broke the second-longest drought in the small-cap index's history. And as we'll see, this is a good sign for future gains, with 13% upside over the next year...

This Isn't the End of New Highs for Small Caps

New highs tend to spook the casual investor. When prices have never been higher, where is there to go next?

Most assume the answer is "down." But we know that rising prices usually mean more gains are likely.

That's true with new highs as well... especially after a drought of all-time highs like we've seen recently for small-cap stocks.

It took 967 trading days... But small caps finally made it back to all-time highs. The chart below shows just how crazy this drought was. Take a look...

The line shows the number of days it took for the index to reach a new high. (It resets to zero when the high arrives.) The only longer drought was after the dot-com bust.

To see what this means going forward, I looked at every instance of a 250-plus-day drought. We've only seen 11 other droughts of that length since 1978. Here's what happened if you bought the day after they ended...

Small-cap stocks might have lagged in recent years. But they've been a solid long-term winner... growing at 9.2% a year for nearly five decades.

Still, you can do much better if you buy when the index makes a new all-time high after a long drought.

Similar setups led to gains of 7.2% in three months, 7.7% in six months, and 12.6% over a year. That's healthy outperformance. Plus, the last time we saw a similar setup was in late 2020... Small caps soared 38% over the next year.

Folks have mostly given up on small caps in recent years. After all, why bother with them when the biggest stocks are delivering massive gains?

Now, though, small-cap stocks are back. They're hitting new highs for the first time in years. And according to history, we can expect the gains to continue in the months ahead.

Good investing,

Brett Eversole