Stocks of unprofitable companies in the Russell 2000 have risen by about 60% since April 2025. Profitable small-cap companies gained about 38% over the same period. These figures are provided by Apollo Global Management.
In 2026, the gap became even more noticeable. Torsten Slok from Apollo pointed out that investors are increasingly willing to buy unprofitable businesses, even though such companies were previously considered riskier.
Unprofitable Russell 2000 Companies Led the Rally
The picture looks unusual. At the end of last year, out of about 2,000 companies in the Russell 2000 about 806 were operating at a loss. Another 1,120 companies were profitable.
This imbalance itself is not new. Back in November 2023, Slok warned that unprofitable companies could be hit harder by high rates and a slowing economy.
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But the opposite happened. Stocks that were considered the most vulnerable unexpectedly became among the growth leaders.
Many consider April 2025 the starting point. After a sharp sell-off due to new tariffs, the market quickly turned upward.
Since then, the Russell 2000 has gained nearly 44% from its local low, according to Royce Investment Partners. Microcap stocks rose even more, by about 66%.
When the Russell 2000 broke through key technical levels, market participants saw this as a signal to return to riskier stocks.
Since then, small companies have continued to grow, and the index has set new all-time highs.
Unprofitable companies are outperforming the market. Source: Bloomberg, Apollo chief economist.
AI Bet Fuels Speculative Demand
Most of the current growth leaders are in the tech sector. This includes software, semiconductors, and biotech. All of them have benefited from the AI interest wave.
At Royce Investment Partners they noted that among microcap companies, chipmakers looked especially strong.
Now the market is more interested in the story of future growth than in current financial results. Because of this, there is increasing talk of a possible bubble in the AI sector.
In a June 20 note, Slok wrote:
‘When companies with negative earnings continue to outperform profitable businesses, it points to problems in the market pricing mechanism.’
However, not everyone agrees with this view.
Strategist Morgan Stanley Lisa Shalett believes that small companies now face a different problem: their cost of capital is higher than their asset returns.
Francis Gannon from Royce sees the situation differently. In his opinion, many small companies are indeed involved in building AI infrastructure. He also expects small-cap profit growth to accelerate in 2026.
For now, the trend is unchanged. Unprofitable companies continue to outperform their profitable competitors.
Slok has been talking about this imbalance for several months in a row, but the market is still ignoring him. Much will depend on rates and how long investors continue to believe in the AI trade.
