Unprofitable Russell 2000 stocks have climbed about 60% since April 2025, far outpacing the 38% gain for profitable small-cap firms, according to Apollo Global Management.
The divergence has widened through mid-2026, prompting Apollo chief economist Torsten Slok to warn that the market has stopped pricing risk the way it once did.
Unprofitable Russell 2000 Stocks Lead the Rally
The split is stark. Of the index’s roughly 2,000 members, 806 carried negative trailing earnings late last year. Another 1,120 were profitable, Apollo data showed.
That 40% share is not new. Slok first flagged it in November 2023, warning the loss-making firms would be vulnerable to high rates and slowing growth.
Now those same names lead the market. The reversal is the puzzle Slok keeps returning to.
The rally itself traces to early April 2025. Stocks bottomed after the Liberation Day tariff shock. The Russell 2000 has since gained nearly 44% off that low, Royce Investment Partners said.
Micro-caps did even better, up about 66%. Traders watched the rebound through the Russell 2000 breakout signal that pointed to rising risk appetite.
Small caps have since pushed to fresh record highs across the index.
AI Bets Are Fueling the Speculative Bid
Most of the loss-makers are tech firms, Slok told Fortune. Many sit in software, semiconductors, and biotech, sectors riding the AI stocks driving gains across the broader market.
Semiconductor makers led the micro-cap leg of the advance, Royce noted.
Investors are paying up for the promise of future growth rather than current profit. That reach has fed growing AI bubble fears among strategists eyeing stretched valuations.
“Something is broken in price discovery when companies with negative earnings keep outperforming companies with positive earnings.” Slok wrote in a June 20 note.
Not everyone reads it as froth. Morgan Stanley’s Lisa Shalett notes that small-cap firms carry a cost of capital above their return on assets.
Royce’s Francis Gannon counters that many small caps are genuine suppliers to the AI buildout. He also expects stronger small-cap earnings growth in 2026.
The gap keeps widening, with cheap money and AI enthusiasm holding it open.
Slok has returned to the divergence since October, and it has yet to close. Profitable names closing the distance may hinge on interest rates and how long the AI trade lasts.
