Smaller firms on Wall Street are demonstrating strength that belies their size.

The Russell 2000 index, which tracks shares of small companies, has climbed approximately 22% in the first half of this year. This marks the index's strongest first-half performance since 1991, outpacing the Nasdaq Composite Index by about 9 percentage points and representing its largest lead for the period since 2006. Just last week, the index set new all-time closing highs for four consecutive trading days.

While markets have been dominated for years by AI giants with trillion-dollar valuations, small-cap stocks have often been an overlooked bright spot. Some investors view this performance as a sign that the recent stock market rally, which had been largely confined to major chip companies like Intel and Micron Technology, is finally beginning to spread to other corners of the market.

"Investors are taking a step back to think about 'where the next wave of excess returns might come from,'" said Joshua Schachter, Chief Investment Officer at Easterly Snow. He used a trading term here to refer to returns that outperform the market benchmark. "The market is missing many investment opportunities that are highly attractive from a valuation perspective and worthy of attention."

This is one of the reasons Schachter recently took some profits. He sold semiconductor stocks and other AI-related shares, subsequently rotating the capital into the healthcare, industrial, and consumer discretionary sectors. As for chipmakers? "They are excellent companies," he said, "but the stock valuations are simply too high."