Small-Cap Stocks Could Break Out Soon. The 1 Index to Watch.

The Russell 2000 has gained 6.6% this month through Tuesday. (Michael M. Santiago/Getty Images)

The Dow Jones Industrial Average and S&P 500 have recently set new highs, but the Russell 2000 hasn’t been able to match those accomplishments so far.

Yet the small-cap benchmark has been getting closer and closer to its 2021 record. If the index can set a new high, it could be a bullish sign, hinting at further gains in the second half of 2025.

It has been a strong year for stocks overall. On Aug. 21, the Dow hit a record, its first since December. The S&P 500 last closed at a high on Aug. 14, marking its 18th this year.

The laggard is the Russell 2000. In a market obsessed with AI, small cap names simply haven’t been able to keep pace with large-cap growth stocks.

Created with Highcharts 9.0.1Russell 2000 indexSource: FactSetAs of Aug. 27

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On Wednesday, the Russell 2000 was up about 0.6%, or 13 points, to 2,372. While it has gained about 5.8% so far this year through Tuesday’s close, that pales in comparison to the S&P 500’s nearly 10% gain.

Its current dry spell is one of the longest in recent history, noted Ned Davis Research in a report Monday. As of Tuesday, it has been 952 trading days since the index hit a new high, back in November 2021.

That’s just 30 days short of 982 days the Russell languished between its June 2007 pre-financial crisis high and its next high water mark in April 2011, according to Dow Jones Markets Data. It is a few months short of the record 1,021 trading days it spent between March 2000 and April 2004.

Will the Russell 2000 set a record for futility this year? Not necessarily. Despite worries about the economy, including a slowing job market and stubborn inflation, small-caps seem to be gaining steam.

In August, the Russell 2000 has gained 6.6% through Tuesday, compared with just 2% for the S&P 500. That makes the remaining ground—a gain of just over 3% to would be required to reach the 2021 record—seem manageable.

It’s worth noting there has been at least one false alarm before. In November, the index came within 0.03% of its November 2021 record, only to tumble more than 20% in the coming months, before regaining its upward momentum.

Nonetheless, if the index can set a new high, that could make a strong argument for additional 2025 gains, according to Ned Davis. Setting a record could signal a breakout, the moment when an index or stock prices moves outside a longstanding price band, foreshadowing new upward potential.

“A breakout in the Russell 2000 to its first new high in nearly four years would remove one of the bears’ strongest technical arguments,” wrote Ed Clissold, Ned Davis chief U.S. strategist.

— Douglas Busch contributed to this article.

Write to Ian Salisbury at ian.salisbury@barrons.com