Key Highlights

● The Russell 2000 rose 2.23% in October through Thursday, versus a 2.52% Nasdaq decline.

● Thursday marked the small-cap index's fourth straight gain and eighth advance in nine sessions.

● Russell 2000 futures fell 0.58% Friday, far less than the 2.62% Nasdaq-100 drop.

● Third-quarter GDP grew at a 3.4% annualized rate, above the 3.2% consensus.

While the market's giants trade blows over AI spending, America's smaller companies have been grinding higher. The Russell 2000 was up 2.23% for October through Thursday, outpacing the S&P 500's 0.90% gain and well ahead of the Nasdaq Composite, which was down 2.52%. On Thursday, as megacap tech sank, the small-cap index rose 1.01%.

A streak worth noticing

The Russell 2000 closed Thursday at 2,859.22, up 28.71 points, according to market data. It was the index's fourth straight gain and its eighth advance in the last nine sessions. It started October at 2,796.86. At the end of September, the index was up 12.7% for the year, so October is adding to an already solid 2026.

Friday's pre-market looks less friendly. Russell 2000 futures were down 16.60 points, or 0.58%, at 2,850.70 as of about 8 a.m. ET, according to market data quotes. That is a much smaller drop than the 2.62% decline in Nasdaq-100 futures, which suggests small caps are again being treated as relatively shielded from the AI capex selloff. If the cash index closes near those levels, the month would still end with a gain of roughly 2%, based on that futures quote.

What's driving the rotation

Several forces line up behind small caps this month. The biggest is the rotation away from the handful of companies spending hundreds of billions on AI. A market commentary measure had the S&P 500 excluding AI stocks beating the full index by about 6.4 points in October, and the equal-weight S&P 500 ETF rose 4.57% through Oct. 27. Small caps carry little exposure to the hyperscalers whose cash burn is spooking investors.

Interest rates are the second factor. Smaller companies tend to rely more on floating-rate debt, so they are sensitive to borrowing costs. The 10-year Treasury Yield topped 5.30% earlier this month, its highest since 2002, then fell back to around 4.94% to 4.99%, and one market source said yields are "down almost 40bp in October." The 2-year yield has fallen about 21 basis points over the month. That relief likely helped small caps, though the connection is an interpretation rather than something any single source documented.

The month's Leadership confirms the trend. By combining the September year-to-date figure with October's gain, the Russell 2000 was up about 15.2% for 2026 through Thursday, ahead of the S&P 500's roughly 12.8% and the Nasdaq's 12.7%.

The domestic economy is the third factor. Third-quarter GDP grew at a 3.4% annualized rate, above the 3.2% consensus, and initial jobless claims fell to 194,000. The Fed upgraded its description of growth to "strong."

Risks and what to watch

The headwinds are real. The Fed raised rates in September and markets see about an 85% chance of another hike in December, according to market-implied odds, which could push short-term borrowing costs higher just as small companies refinance. Oil above $100 a barrel lifts input costs for many smaller manufacturers and retailers. And the midterm elections on Tuesday could shift expectations for tax and spending policy.

History offers some comfort, with a caveat. One broker notes that the S&P 500 has been higher 12 months after every midterm election since 1950, but the average midterm-year drawdown has been about 16%.

What to watch: whether the small-cap index can finish October positive despite Friday's softer futures, the Nov. 6 jobs report, and any repricing of December rate-hike odds that would change the outlook for borrowing costs.