The reconstitution of the Russell indices is one of the more meaningful market events on the calendar each year, serving as a reset for how stocks are grouped across size and style indices. FTSE Russell rebuilds its indices by ranking companies based on their market cap while also categorizing them into growth and/or value buckets. With the recent runup in AI stocks, this year’s reconstitution, scheduled for June 26, will be larger with regards to value versus growth and large versus small. We’ll walk you through why the magnitude is larger this time, and how that fits in context with history.

The FTSE Russell indices are the hallmark of U.S. style investing, setting the benchmark for value, growth, large cap, and small cap. We focus this piece on Russell as opposed to other indices because rebalance frequency of other indices tends to be quarterly with greater buffers and turnover controls, while Russell’s is annual (although it is moving to semi-annual this year for large/small, not value/growth). Therefore, the annual buildup of movement amongst companies is implemented all at once.

We’ve seen the AI trade play out over the last 18 months, starting with the large hyperscalers and moving down the supply chain to data centers, semiconductors, then finally to any company that could possibly contribute to the ecosystem. This includes many value names long viewed as more cyclical. But their links to the AI ecosystem has caused the market to recalibrate their future earnings expectations. Exhibit 1 looks at the forward EPS growth rate of Russell 3000 Value stocks, just before and just after the reconstitutions. This year has seen the growth expectations of Russell 3000 Value stocks skyrocket, with the spread between future EPS growth of pre- and post-reconstitution the largest we’ve seen this decade.

Exhibit 1

Unsurprisingly, the weight shifting between the Russell 3000 Value and Growth indices is also the largest it’s been this decade. This year, the Russell 3000 Growth index is set to inherit 18% of the Russell 3000 Value, as highlighted in Exhibit 2. It’s important to note that these businesses within the Value Index have not fundamentally changed, but the market is assigning higher growth expectations to them. This imbalance highlights how much stronger the pull has been towards growth this cycle, driven in large part by the repricing of AI-related names.

Exhibit 2

As there are seismic shifts between growth and value, we’re also seeing similar dynamics between large and small cap. Exhibit 3 highlights the percent of the Russell 2000 (small cap) moving to the Russell 1000 (large cap). We’re seeing almost one-fifth of the small-cap index graduating into large-cap territory. While the new cohort of large-cap stocks will only make up 0.9% of the large-cap benchmark, it’s an important shift that will impact the makeup and complexion of large-cap stocks and the subsequent small-cap indices.

Exhibit 3