For most of its history, the Russell 2000 index has been driven by a single industry: regional banks.
When the economy did well, regional banks prospered and small-caps followed. When a recession unfolded, they were the first collateral damage.
Something different is unfolding now.
Regional banks – tracked by the SPDR S&P Regional Banking ETF (NYSE:KRE) – are still stuck well below their 2022 peak while the broader small-cap index runs to new record highs without them.
Two lines that usually move together have split apart, as the chart below shows.
If regional banks did not drive this rally, something else did.
Where Russell 2000 Gains Are Actually Coming From
The iShares Russell 2000 ETF (NYSE:IWM) has gained 18% year-to-date through May 27, but the drivers of the rally look very different from those in prior small-cap cycles.
Performance attribution data from Koyfin show that technology and industrial stocks have done almost all the heavy lifting.
Information technology — which represents 18.3% of the Russell 2000 — has surged 43% in 2026, contributing roughly 6.5 percentage points to the index's overall return. In other words, about one-third of the Russell 2000's gains came from tech alone.
Industrials, which carry a similar weighting near 18%, have climbed 25%, adding another 5 percentage points to performance.
Combined, tech and industrials account for more than 70% of the Russell 2000's year-to-date advance.
Financials, by contrast — despite making up 15.4% of the index at the sector level — have returned just 7%, contributing only about 135 basis points to the rally.
A deeper look at industry-level performance makes the divergence even more striking.
Semiconductors and semiconductor equipment — which represent 5.6% of the Russell 2000 — have soared 133% year-to-date, contributing roughly 3 percentage points to the ETF's overall return.
Electrical equipment stocks have climbed 56%, adding another 2.6 percentage points to performance.
Regional banks tell the opposite story.
Despite carrying the largest industry weighting in the Russell 2000 at 9.2%, regional lenders have gained just 11% in 2026, making only a modest contribution to the benchmark's rally.
The regional-bank story is not collapsing — it is absent. KRE has not crashed. It has simply stopped leading.
The AI Trade Has Moved Downmarket
The names driving IWM are not abstractions. They are specific bets on the physical build-out of artificial intelligence — the chips, the cabling, the power systems and the cloud capacity that data centers consume.
Bloom Energy Corp. (NYSE:BE), a fuel-cell maker now supplying on-site power to AI data centers, is the single largest contributor to IWM’s year-to-date return, up 233.60%.
Applied Optoelectronics Inc. (NASDAQ:AAOI), which makes optical components for data-center networking, has gained 416.61%.
Credo Technology Group Holding Ltd (NASDAQ:CRDO), a high-speed connectivity chip designer, and DigitalOcean Holdings Inc. (NYSE:DOCN), a cloud platform leaning hard into AI inference, round out the leaders.
Sterling Infrastructure Inc. (NASDAQ:STRL), an e-infrastructure builder tied to data-center construction, sits among them.
Every one of those companies sells into the same demand wave.
Investors are no longer chasing AI only through Nvidia Corp. (NASDAQ:NVDA) and Micron Technology Inc. (NASDAQ:MU).
They are reaching down into the Russell 2000 for the next layer of the trade — the suppliers and builders one step removed from the chips themselves.
For now, the index is being carried by a growth story rather than a credit story.
| Company | Sector | YTD Return | IWM Contribution |
|---|---|---|---|
| Bloom Energy Corp. | Industrials | +233.60% | +163 bp |
| Applied Optoelectronics Inc. | Info. Technology | +416.61% | +34 bp |
| DigitalOcean Holdings Inc. | Info. Technology | +223.98% | +29 bp |
| Credo Technology Group Holding Ltd | Info. Technology | +49.62% | +41 bp |
| Sterling Infrastructure Inc. | Industrials | +152.17% | +47 bp |
Photo: Shutterstock
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