By Philip van Doorn

The Russell Microcap Index has more than doubled the performance of the S&P 500 this year

Microcap stocks as a group have soared this year. That comes with a warning - investors might want to be selective.

The Russell Microcap Index has seen some big gains this year - and Wall Street strategists are starting to notice.

Hardika Singh, an economic strategist at Fundstrat, pointed out in a note to clients on Monday that the Russell index was outperforming other broad U.S. stock-market indexes so far in 2026.

She cited data showing that the Russell Microcap Index's outperformance relative to the S&P 500 SPX was highest since at least 2006 and called the microcap performance "a sign of how speculation is running rampant."

The Russell Microcap Index is made up of the smallest 1,000 stocks in the Russell 2000 Index RUT by market capitalization, plus additional companies among the smaller names in the Russell 2000. There were 1,267 stocks in the Russell Microcap Index as of May 31, according to FTSE Russell's most recently updated fact sheet for the index. The Russell indexes are reconstituted twice annually in December and June. The iShares Micro-Cap ETF IWC, an exchange-traded fund that tracks the Russell Microcap Index, held 1,375 stocks as of July 2.

Companies in the Russell Microcap Index had a median market cap of $304 million as of May 31, while those in the Russell 2000 had a median market cap of $1.12 billion, according to FTSE Russell.

There is overlap between the Russell Microcap and Russell 2000 indexes, but since the Russell indexes are weighted by market cap, the Microcap index's performance can be distinct from that of the Russell 2000.

Here is how those two indexes, along with the Russell 1000 RUI (which is made up of the largest 1,000 stocks in the Russell 3000 by market cap) and the S&P 500 SPX have performed this year through July 3, with dividends reinvested:

The Russell Microcap Index has outperformed broad small-cap and large-cap indexes so far in 2026.

Signs of froth?

According to Singh, a rally for stocks of small companies "is typically seen as a bullish sign for the U.S. economy because a majority of them tend to earn most of their revenue domestically, but that historical relationship has decoupled some in recent years."

She added that this year's outperformance for small-cap and microcap stocks "can be viewed as a sign of froth in the market."

At this point, one might want to compare weighted price/earnings valuations in the indexes for signs of excess speculation. For the S&P 500, the forward P/E ratio (weighted prices divided by rolling 12-month consensus earnings-per-share estimates) declined to 20.1 from 22.5 at the end of last year. But this approach doesn't work for the Russell Microcap and Russell 2000 indexes, because each includes hundreds of unprofitable companies and because many of the companies in those indexes aren't covered by analysts working for brokerage or research firms.

So we can look at trailing price/sales ratios for exchange-traded funds that track the indexes, as calculated by FactSet. These are weighted ratios of constituent companies' valuations divided by reported revenue over the preceding 12 months. Here they are for four ETFs, along with five-year total returns with dividends reinvested through July 3:

ETF Trailing price/ sales Five-year avg. trailing price/ sales Five-year total return iShares Micro-Cap ETF 1.6 1.4 38% iShares Russell 2000 ETF 2.0 1.7 38% iShares Russell 1000 ETF 4.1 3.3 78% State Street SPDR S&P 500 ETF Trust 4.3 3.5 84% Source: FactSet

Despite this year's outperformance for the microcaps and small-cap stocks, they have lagged behind over five years, and their trailing price/sales valuations are much lower for ETFs tracking the smaller-cap indexes.

Singh warned: "One wouldn't be too far off to suggest that small-caps have become trend followers rather than trendsetters," in light of the small-caps' initial lead over large-caps following the COVID-19 pandemic, and because the small-caps lagged behind large-caps during the initial phases of the generative artificial intelligence build-out.

A microcap stock screen

You have seen how microcaps on the index level have underperformed large-caps over the past five years, despite a strong showing so far in 2026. The microcap space might be best approached with an active strategy, as specialists select the stocks. One example is the Royce Micro-Cap Fund RYOTX, which we profiled last month, comparing its performance with some competing funds.

With Singh's warning in mind for small-caps and microcap stocks on the index level, you might also be interested in a screen of microcap stocks that analysts expect to put up some eye-popping numbers.

Starting with the 1,375 holdings of the iShares Micro-Cap ETF IWC, and considering that scores of these companies are unprofitable, we screened for expected revenue growth over the next two years.

We narrowed the list to 408 companies covered by at least five analysts polled by FactSet.

Not only are many companies within the microcap index unprofitable, but many included biotech companies haven't yet booked any revenue. So we narrowed our list further to 298 companies expected to have revenue of at least $10 million this year. We used analysts' consensus revenue estimates, as adjusted for calendar years, for companies whose fiscal reporting periods don't match the calendar.

We cut further to 240 companies for which consensus revenue estimates were available through 2028.

Among the remaining 240 companies, nine are expected to increase revenue at compound annual growth rates (CAGR) of more than 100% from calendar 2026 through 2028. There is too much data for one table, so we will split it into two.

Dollar figures are in millions. The first table shows the projected sales CAGR, market caps and the percentage of "buy" or equivalent ratings among analysts polled by FactSet:

Company Projected sales CAGR from 2026 through 2028 Market Cap. Share "buy" ratings Virgin Galactic Holdings 462.7% $282 22% Viridian Therapeutics 364.5% $2,142 100% Lenz Therapeutics 166.0% $185 86% Replimune Group 157.6% $972 38% Aeva Technologies 143.1% $1,619 60% Serve Robotics 137.0% $488 86% Zenas BioPharma 120.5% $1,719 88% Unusual Machines 108.6% $1,055 100%

The second table includes price/sales ratios based on market caps as of the close on July 3, and on the consensus 2026 and 2028 sales estimates. The calendar-year sales estimates are also included, in millions:

Company Price. 2026 sales estimate Price/ 2028 sales estimate Est. 2026 sales Est. 2027 sales Est. 2028 sales Virgin Galactic Holdings 17.2 0.5 $16 $288 $519 Viridian Therapeutics 77.5 3.6 $28 $232 $597 Lenz Therapeutics 9.7 1.4 $19 $65 $135 Replimune Group 58.2 8.8 $17 $71 $111 Aeva Technologies 50.5 8.6 $32 $71 $189 Serve Robotics 19.0 3.4 $26 $77 $144 Zenas BioPharma 56.9 11.7 $30 $63 $147 Unusual Machines 26.7 6.1 $40 $64 $172

This is a speculative list of stocks. Virgin Galactic Holdings (SPCE) tops the list, with annual revenue projected to total $16 million this year, rising to an estimated $519 million in 2028. But only two of the nine analysts covering Virgin Galactic rate the stock a buy. A third of them rate the stock a sell, while the rest have neutral ratings. This reflects the tendency of analysts working for brokerage firms to base their ratings on 12-month price targets. This is an expensive stock relative to this year's expected revenue. Then again, if the analysts are anywhere near correct in their expectations for ballooning revenue over the next two years, we might look back at some point and say this was the time to jump in.

If you see any stocks of interest here, you should do your own research to form your own opinion about companies' strategies and the likelihood of being competitive over the next decade. One way to begin your research is to click on the tickers for more about each company.

-Philip van Doorn This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.