Analyst: Although US small- and mid-cap stocks have risen 20% year-to-date, caution is warranted regarding bubble risks stemming from non-earnings-driven performance.

TechFlow reports that on July 14, US small- and mid-cap stocks are breaking free from years of stagnation and posting their best returns in over two decades, as investors shift from high-growth tech giants to undervalued stocks benefiting from the artificial intelligence investment boom. Year-to-date, the US small-cap benchmark index, the Russell 2000, has risen 20%, poised for its best performance since 2003, while S&P 500 blue-chip stocks have climbed 10%, and so-called "Magnificent Seven" tech stocks have gained less than 3%.

However, some analysts point out that the current rally in small- and mid-cap stocks is largely driven by non-profitable components, indicating ongoing overoptimism and bubble risks, which leaves sustainability in question.