The stock market’s two-year bull run is broadening out beyond large caps and Big Tech

The Russell 2000 and Dow are finally starting to catch up to the S&P 500 and Nasdaq Composite. Does it mean the stock rally is on more solid footing?

The S&P 500 and Nasdaq Composite tallied fresh record closing highs on Thursday, buoyed by a stronger-than-expected jobs report that helped dampen expectations for a Federal Reserve interest-rate cut in July.

But after lagging their trendier rivals earlier in the year, the Russell 2000 and Dow Jones Industrial Average are finally starting to play catch up. On Thursday, the Russell 2000 turned positive for 2025 for the first time since February, as a rally that started in June has accelerated in July.

Many investors have been waiting patiently for small-cap stocks to break out. But aside from a few false starts over the past two years, they have mostly continued to lag their large-cap rivals. However, some investors believe things could finally be changing.

A team of strategists at Barclays pointed out on Wednesday that a proposed increase to interest-expense tax deductions in President Trump’s budget bill could boost small-cap companies’ earnings by double digits, due to their higher interest burdens.

“This market broadening out is a heathy sign,” said Craig Johnson, chief market technician at Piper Sandler, during an interview with MarketWatch on Thursday.

More small-cap participation inevitably means investors are developing more of a taste for stocks beyond information technology, which powered much of the market’s gains in 2023 and 2024.

Johnson pointed out that one advance-decline line he monitors closely recently returned to record territory for the first time since 2021. This gauge, which dates back to 1969, incorporates more than 4,000 stocks of all different styles and sizes, while excluding ETFs. Analysts typically use advance-decline lines as a gauge of stock-market breadth, since they tend to rise more quickly when the number of stocks in an uptrend grows.

Already, leadership within the S&P 500 has started to shift. Since the start of 2025, industrials and financials have been the top-performing sectors.

The fact that small caps and the Dow have performed so well of late could mean investors are hunting for bargains by buying stocks that are more attractively priced relative to the expected profits of their companies.

“There’s an old saying that the lifeblood of a bull market is rotation and participation,” said Ryan Detrick, chief market strategist at Carson Group, during an interview with MarketWatch on Thursday. “To see the underloved area of small caps, specifically, finally participating is just another sign that this bull market continues to broaden out, which should be good for the overall structural bull market that we’ve been in for two years now.”

But is it a game changer?

The fact that the Dow is on track to tally its first record high since December as soon as next week is certainly encouraging. But one stock-market strategist pointed out that strong performance from the blue-chip index isn’t exactly a “game changer” for stock-market bulls.

In other words, investors shouldn’t be pouring more money into the stock market just because the Dow, which includes only 30 stocks, is back near record highs, said Tom Essaye, founder of Sevens Report Research, in commentary recently shared with MarketWatch.

Seeing the Russell 2000 or the equal-weighted version of the S&P 500 hitting record highs would be far more encouraging for bulls, Essaye said. While both indexes have moved closer to record territory in recent days, they both have a ways to go before surpassing their most recent record highs from November.

There is also the matter of the Dow Theory — a century-old investment signal that has continued to read bearish, despite the market’s progress since the April lows.

A new high for the Dow would satisfy one tenant of Dow Theory. But the Dow Transportation Average would still need to confirm it, and lately, the transportation average has been trending lower.

The Dow and Russell 2000 both joined the S&P 500 and Nasdaq in the green on Thursday. The Dow rose by 344.11 points, or 0.8%, at 44,828.53, while the Russell 2000 gained 22.66 points, or 1%, at 2,249.04. The S&P 500 climbed 51.93 points, or 0.8%, at 6,279.35, and the Nasdaq advanced by 207.97 points, or 1%, at 20,601.10.