Small caps’ ‘recovery’ is a myth built on unprofitable stocks. Here’s what history says happens next.

MarketWatch

by Mark Hulbert

February 25, 2026

AI-Generated Deep Dive Summary

The Russell Microcap Index has been experiencing a strong upward trend, but this apparent recovery is misleading. Despite the index's growth, an astonishing 57% of its constituent companies actually lost money last year. This discrepancy raises significant concerns about the sustainability of the rally and highlights the risks inherent in investing in small-cap stocks without careful consideration. Historically, such situations have often been warning signs of broader market instability. The article draws parallels to past financial bubbles and crises where similar imbalances between index performance and underlying company fundamentals occurred. These instances frequently led to sharp corrections or crashes as investors realized that the overall market movement did not reflect the true health of individual companies. The key takeaway is that relying solely on the performance of an index like the Russell Microcap can be a dangerous approach. Investors must dig deeper into the financial health and profitability of individual stocks within such indices. The article emphasizes that small-cap stocks, while potentially offering high growth opportunities, are inherently riskier due to their limited market capitalization and vulnerability to economic shifts. For those interested in finance and investing, understanding these dynamics is crucial. It underscores the importance of conducting thorough research and diversifying one's portfolio to mitigate risks associated with overexposure to underperforming sectors or individual stocks. The article serves as a timely reminder that even in the face of market upturns, caution and critical analysis are essential to safeguarding investments. In conclusion, while the Russell Microcap Index may appear to be on an upward trajectory, the reality for many of its components is far less rosy. This imbalance not only questions the sustainability of the rally but also underscores the need for investors to remain vigilant and informed in their decision-making processes.

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Originally published on MarketWatch on 2/25/2026