URBN, GAP, SHAK: Small-Cap Stocks Surge as Investors Rotate Out of Magnificent Seven

Small-cap stocks are surging to begin the year and outpacing large-cap technology stocks.

The Russell 2000 (RUT) index of small-cap equities in the U.S. is already up 8% in 2026, crushing the benchmark S&P 500’s 1.4% year-to-date gain, according to data from FactSet (FDS). Small-cap stocks are typically defined as securities with a market capitalization of $10 billion or less.

Well-known small-cap stocks include names such as Urban Outfitters (URBN), the Gap (GAP), and Shake Shack (SHAK). Some notable small-cap stocks, such as Shake Shack, are up more than 10% so far this year as investors rotate away from mega-cap technology stocks that dominated throughout 2025.

Why Small-Cap Stocks Are Outperforming

Beyond the investor rotation, analysts say that small-cap stocks are surging on expectations for more interest rate cuts from the U.S. Federal Reserve, as lower interest rates tend to help smaller companies that borrow more heavily to fund their operations.

There is also growing optimism concerning U.S. corporate earnings, particularly related to smaller companies and those listed on the Russell 2000 index. The gains in small-cap stocks appear to be coming at the expense of the so-called “Magnificent Seven” mega-cap technology companies.

The Roundhill Magnificent Seven ETF (MAGS), which seeks to equally weight big technology stocks in that group, has fallen 1.6% this year. The stocks of Apple (AAPL) and Meta Platforms (META) have each declined 6% so far in January, while Microsoft’s (MSFT) stock is down 5% year-to-date.

Is MSFT Stock a Buy?

Microsoft’s stock has a consensus Strong Buy rating among 34 Wall Street analysts. That rating is based on 32 Buy and two Hold recommendations issued in the last three months. The average price target on MSFT stock of $631.36 implies 37.29% upside from current levels.

Read more analyst ratings on MSFT stock