U.S. Small-Cap Stocks Outperform Large Caps, Deliver Strong Returns

Small-cap index funds have posted robust one‑year performance, with the State Street Small‑Cap SPDR ETF (SPSM) achieving a 36.9% trailing 12‑month return as of June 26. Analysts cite high growth potential, lower expense ratios and opportunities from mergers and acquisitions as reasons investors are turning to smaller companies despite higher volatility.

U.S. equity markets have seen a shift away from the long‑standing dominance of large‑cap technology names. Over four consecutive quarters from Q3 2025 to Q2 2026, small‑ and mid‑cap stocks have outpaced large caps, and in Q1 2026 they posted positive returns while the S&P 500 fell 4.3%. Valuations for small‑caps are near a 25‑year low relative to large caps, and their weight in the Russell 3000 remains below historical averages. Forecasts suggest small‑cap earnings growth will exceed that of large caps, bolstered by fiscal provisions favoring smaller firms. A paused Federal Reserve rate‑cut cycle and increasing AI‑related capital spending directed at domestic small‑mid‑cap infrastructure suppliers further support continued outperformance through 2026.