The small-cap stocks with the “good” fundamentals are finally starting to participate.
Until recently, leadership in small caps was coming almost entirely from indexes that didn’t care whether companies made money or not.
If you were small enough, you were in. Profitable or not.
That created a noticeable gap.
Small-cap indexes with no earnings requirements were ripping higher, while the indexes that require companies to be profitable lagged behind.
That difference matters.
According to Standard & Poor’s, the S&P 600 uses an earnings screen.
Companies must have a track record of positive earnings before they can be included in the index.
And, now, that group is starting to catch up.
New All-Time Highs for the S&P 600
The Russell 2000 small-cap index has been the headline-maker to start the year, pushing to new all-time highs and grabbing most of the attention.
One reason is simple. Earnings don’t matter in the Russell 2000.
It’s just a collection of the smallest 2,000 companies in the Russell 3000, regardless of profitability.
The S&P 600 is different.
It holds only 600 companies and requires a track record of positive earnings before a stock can be included.
Those “good fundamentals” create a very different mix beneath the surface.
Yesterday, that index finally closed at the highest level in its history:
One of the biggest differences between the two indexes is biotechnology exposure.
The S&P 600 has far less of it, while the Russell 2000 has much more.
That matters because most small biotech companies don’t make money.
And if they don’t earn money, they have a hard time qualifying for inclusion in the S&P 600.
As a result, much of the strength we’ve seen in biotech has shown up far more clearly in the Russell 2000 than in the S&P 600.
Until now.
Both indexes are loaded with financials, plenty of technology, and a healthy dose of industrials.
But the S&P 600 also carries significantly more consumer discretionary exposure, paired with much less biotech.
They’re built differently. And that difference is finally starting to show up in the price.
Don’t Let Funnymentals Distract You
Index construction matters. What’s inside these indexes explains a lot of the performance differences people love to argue about.
Once you break it down, the reason for the gap is obvious.
The index that requires “good fundamentals” has been competing against an index tracking similar companies without any earnings requirement at all.
For most of the cycle, that’s been a disadvantage.
The results speak for themselves.
In 2025, the Russell 2000 ETF (IWM) more than doubled the return of the S&P 600 ETF (IJR). IWM gained 12.6%, while IJR returned just 5.8%.
“Buy companies with good fundamentals” is some of the worst advice I was ever given.
The market disproves that idea every single day.
It’s why I ignore fundamentals on purpose. Not because I don’t understand them, but because I understand them better than most.
You see, if you only focus on companies with “good fundamentals,” you’ll miss many of the biggest winners the market has ever produced.
Do not let the funnymentals distract you.
Focus on the only thing that actually pays anyone in this business, price, and the direction it’s moving.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs