Unprofitable Russell 2000 stocks have surged about 60% since April 2025, far outpacing the 38% gain for profitable small-cap firms, according to Apollo Global Management chief economist Torsten Slok. The divergence has widened through mid-2026, prompting Slok to warn that the market has stopped pricing risk as it once did. Of the index's roughly 2,000 members, 806 carried negative trailing earnings late last year, while 1,120 were profitable. The rally traces to early April 2025 after the Liberation Day tariff shock, with the Russell 2000 gaining nearly 44% from its low. Most loss-makers are tech firms in software, semiconductors, and biotech, sectors riding the AI boom. Investors are paying for future growth rather than current profit, fueling AI bubble concerns. Slok noted, 'Something is broken in price discovery when companies with negative earnings keep outperforming companies with positive earnings.' Not everyone sees froth: Morgan Stanley's Lisa Shalett notes small-cap cost of capital above return on assets, while Royce's Francis Gannon expects stronger small-cap earnings growth in 2026. The gap may close if interest rates rise or the AI trade fades.

Key facts

• Unprofitable Russell 2000 stocks surged ~60% since April 2025, vs. 38% for profitable firms.
• 806 of ~2,000 Russell 2000 firms had negative trailing earnings late last year.
• Rally sparked by April 2025 tariff shock; Russell 2000 gained 44% from low.
• Most loss-makers are tech firms in AI-linked sectors like semiconductors.
• Apollo's Slok warns market price discovery is 'broken'; gap may close if rates or AI trade shift.

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