By Hannah Erin Lang and Shradha Dinesh

Small companies are punching above their weight on Wall Street.

The Russell 2000, which tracks shares of smaller companies, climbed some 22% in the first six months of the year. That is the best first half since 1991, beating the Nasdaq composite by around 9 percentage points — its largest outperformance in that period since 2006. At one point last week, the index notched four straight record closes.

It is an often-overlooked bright spot in a market that has for years now been dominated by the trillion-dollar giants of the artificial-intelligence trade. Some investors are taking it as a sign that the recent run-up in stock prices, confined mostly to big chip companies such as Intel or Micron Technology, is at long last spreading to other corners of the market.

"Investors are stepping back and saying 'Where might the next leg of alpha come from?'" said Joshua Schachter, chief investment officer at Easterly Snow, referring to the trading term for outperforming market benchmarks. "The market was missing a lot of interesting ideas with great valuations."

That is one reason why Schachter has taken some profits lately, selling semiconductor stocks and other AI plays before rotating those funds into companies across the healthcare, industrials and consumer-discretionary sectors.

The chip makers? "They're great companies," he said. "But the stocks are just so expensive."

The prospect that the Federal Reserve would lower borrowing costs in 2026 helped companies with smaller market-capitalizations notch a strong start to the year, before the war with Iran upended those bets. Now, small-caps are benefiting from a resilient economy that appears set to improve in the coming months.

Inflationary pressures have eased following the U.S.-Iran peace deal, which drastically lowered the cost of oil. Thursday's jobs report showed a cooling labor market, stirring hopes that the Fed will hold off on raising rates later this year, but not so cold that it raised fears of slowing growth.

That shifting outlook is particularly beneficial for small-cap companies, which tend to earn much of their money domestically and — having less access to capital markets than multinationals — often borrow using rates that adjust with those set by the Fed.

Add to that the fact that U.S. companies are earning gobs of money, and the windfall isn't limited to the likes of Microsoft or Nvidia. Among the biggest gainers in the S&P Small Cap 600 index last quarter: the buy now, pay later platform Sezzle and the restaurant chain Cracker Barrel.

Asked about the outlook in a first-quarter earnings call, Charlie Youakim, Sezzle's chief executive, said "It seems like our customers are perfectly healthy to us when we look at the numbers."

Francis Gannon, a managing director at Royce Investment Partners who primarily invests in small-caps, noted that analysts project 54% earnings growth for companies in the Russell 2000 in 2026. That is more than double the rate expected for the Russell 1000, which tracks large-cap stocks.

"The earnings story for small-caps is pretty strong, and it's just beginning," Gannon said. "We have a bit of a run coming."

Small-caps can be more volatile than shares of larger, more-established companies and have often lagged behind shares of big companies. And the Russell 2000 still contains chip stocks, meaning it has also been boosted by the same frenetic rally that has powered parabolic gains in chip names such as Sandisk and Dell Technologies. That means small-cap indexes might be subject to the same shifts in AI sentiment that have plagued larger tech companies in recent weeks.

Other top performers in the S&P Small Cap 600 last quarter included semiconductor company MaxLinear, up more than 600%. Winners also included chip maker Vishay Intertechnology and the AI-infrastructure business Penguin Solutions, each seeing their stock price more than double in the second quarter.

"Some sectors are doing better than others," said Philip Blancato, chief market strategist at Osaic. "It really is a small portion of the index that drove these returns."

Small-caps still make up a relatively tiny part of the market compared with their supersize peers. The combined market value of all the companies in the S&P Small Cap 600 comes out to $1.83 trillion — or roughly the same size as Broadcom.

For the Russell 2000, there may be an additional challenge: the index did its annual rebalancing recently, graduating some top-performing members to the large-cap Russell 1000.

But as the red-hot chip-stock rally sputters, even the biggest bulls are wondering how much longer the latest leg of the AI frenzy can last and where money might go as it fades. Even a sliver of those investments rotating into smaller shares would make a big difference, said Keith Lerner, chief investment officer at Truist Advisory Services.

"It just doesn't take a lot," he said. "A little bit of good news has gone a long way for small-caps."

Write to Hannah Erin Lang at hannaherin.lang@wsj.com and Shradha Dinesh at shradha.dinesh@wsj.com