By Noel Randewich

SAN FRANCISCO (Reuters) - Halfway through 2018, investing in Wall Street's leading S&P 500 stock index has been nothing to shout about.

The index of about 500 of the largest U.S. corporations has risen 1.7 percent year to date, far short of its 8 percent increase in the first half of 2017, even as the technology-heavy Nasdaq <.IXIC> and Russell 2000 index <.RUT> of smaller companies hit record highs.

Including dividends, the S&P 500 <.SPX> has returned about 3 percent in 2018, compared with nearly 22 percent last year.

Mutual funds and exchange traded funds with over $3 trillion in assets use the S&P 500 as their benchmark, according to Thomson Reuters Lipper, making the index's performance central to Wall Street.

For a graphic on S&P 500 underperforms, click https://reut.rs/2NbsFjB

While newly enacted corporate tax cuts propelled a nine-year bull market higher in January, fears of an escalating global trade war lately have become a persistent counterweight denting sentiment.

Investors currently favor small-cap stocks because those companies are seen as benefiting more than large companies from the deepest overhaul of the U.S. tax code in over 30 years, with some on Wall Street also betting that smaller companies may be less at risk of trade tariffs.

The Russell 2000 index is up 7 percent year-to-date, while the Nasdaq has surged 9 percent, buoyed by the tech sector's popularity with investors.

For a graphic on Sectors since Jan 26 market high, click https://reut.rs/2KwHviJ

The Dow Jones Industrial Average <.DJI> has declined 2 percent in the past six months, weighed down by double-digit declines in 3M Co (NYSE: MMM), Procter & Gamble Co (NYSE: PG), Caterpillar Inc (NYSE: CAT) and General Electric Co (NYSE: GE), which in June was evicted from the group of 30 top-shelf U.S. corporations.

Market strategists polled by Reuters last month predicted on average that the S&P 500 would post an annual gain of 7 percent in 2018, more modest than the 9 percent increase they predicted in a February survey.

Since hitting an all-time high on Jan. 26, the S&P 500 index has fallen 5 percent, with declines in banks and consumer staples offsetting a recovery in technology stocks including Apple Inc (NASDAQ: AAPL) and Facebook Inc (NASDAQ: FB), both up close to 10 percent in the past six months.

For a graphic on Financials Since Jan 26, click https://reut.rs/2IAPlGv

Financials, which account for about 13 percent of the S&P 500, have been badly bruised, falling 11 percent since the index's record high. Morgan Stanley (NYSE: MS), Goldman Sachs Group Inc (NYSE: GS), and Citigroup Inc (NYSE: C) have each fallen 15 percent since Jan. 26.

Rising short-term interest rates and falling long-term rates, a combination that makes bank lending less profitable, have contributed to weakness in bank shares.

For a graphic on Valuations cool off, click https://reut.rs/2tCVWLW

While 2018 has offered scant returns for S&P 500 investors, it has provided more than its share of volatility. Twenty-nine percent of trading sessions in the first half of 2018 saw moves greater than 1 percent in either direction, compared with just 3.2 percent of trading days in all of 2017, according to a report from Bespoke Investment Group.

Optimism around the tax cuts has Wall Street expecting S&P 500 earnings per share to surge 22 percent in 2018. Those unusually high earnings projections, and the stock market's mostly lateral movement over the past five months, have made stock valuations appear more reasonable than they had late in 2017.

The S&P 500 is now trading at just over 16 times expected earnings, down from over 18 at the market's high in January, and in line with the index's five-year average valuation, according to Thomson Reuters data.

For a graphic on U.S.-China trade and the S&P 500, click https://reut.rs/2ICOULJ

(Reporting by Noel Randewich; Editing by Susan Thomas and Leslie Adler)

Reuters