Stock Market Insights: Revisiting small caps in a changing market

Joe Shearrer, CPFA® is Vice President and Wealth Advisor at Fervent Wealth Management.

Last weekend, I had one of those rounds of golf that didn’t make much sense on paper. Typically, my strength is putting, the part of my game I rely on to save strokes and stay consistent. But this time, it was the opposite. My driver was dialed in, my irons were sharp, and I was giving myself great looks all day. The problem? I couldn’t make a putt.

It was a good reminder that performance doesn’t always come from the places you expect. The parts of your game you rely on most take a step back, while other areas quietly step forward and carry the load. Investing works much the same way.

For much of the past several years, the stock market has been dominated by a narrow group of large, well-known companies. Their size, stability and consistent earnings growth made them the clear choice for investors navigating uncertainty. Meanwhile, smaller companies, often more sensitive to economic cycles and borrowing costs, were largely left behind. That dynamic may now be shifting.

This week, we made a small increase in exposure to both small cap growth and small cap value. The move reflects a broader change in the investment landscape, one that could make smaller companies more attractive as we move through the rest of 2026. One of the most compelling reasons is valuation. Small caps continue to trade at a noticeable discount compared to their large cap counterparts, both relative to history and on a forward-looking basis. For years, that gap persisted as investors favored the perceived safety of larger firms. However, as interest rates have remained elevated and capital is no longer as cheap as it once was, markets have begun to reassess what they are willing to pay for growth. In environments like this, valuation tends to matter more, and that has historically worked in favor of smaller companies.

There are also signs that market leadership is beginning to broaden. Rather than relying on a concentrated group of stocks to drive returns, participation has started to widen across sectors and company sizes. This type of shift is often viewed as a healthy development, suggesting a more balanced and durable market. Small caps have typically performed well during these periods, as investors look beyond the largest names for opportunities.

The economic backdrop also plays a role. Despite ongoing concerns about a potential slowdown, the U.S. economy has shown resilience. Consumer spending has held up better than expected, and overall growth has remained steady. This matters because small cap companies tend to be more domestically focused. When the U.S. economy continues to expand, even modestly, these businesses are often positioned to benefit more directly than their multinational peers.

Interest rates, which were a significant headwind for small caps in recent years, may also become less of a drag. While rates remain higher than they were in the previous decade, the pace of increases has slowed, and markets have had time to adjust. Smaller companies, which often rely more on external financing, are particularly sensitive to changes in borrowing costs. Stability in rates, even without sharp declines, can help ease that pressure and create a more supportive environment.

Importantly, the opportunity is not limited to a single segment of the small cap market. Small cap value stocks offer relatively attractive pricing and can perform well in steady economic conditions. At the same time, small cap growth companies provide exposure to innovation and may benefit if financial conditions improve or investor sentiment shifts toward risk-taking. A balanced approach allows investors to participate in multiple potential outcomes.

Of course, small caps are not without risk. They tend to be more volatile and can be more vulnerable during periods of economic stress or tighter credit conditions. Earnings can be less predictable, and access to capital can become more constrained if conditions deteriorate.

I didn’t leave that round of golf thinking I needed to completely reinvent my game. My putter will probably come around again, it usually does. It was a reminder that success often comes from being adaptable and recognizing where your strengths are right now, not where they’ve been historically. The same principle applies to investing; sometimes better results don’t come from making drastic changes, but from small shifts at the right time. And in both golf and investing, those adjustments can make all the difference.

Have a blessed week!

Joe Shearrer

www.FerventWM.com

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. All performance cited is historical & is no guarantee of future results. All indices are unmanaged and may not be invested directly.

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. Growth stocks are generally companies with higher valuations and anticipated rates of growth compared with the rest of the stock market. Growth stocks usually do not pay dividends. Value stocks typically pay higher than average dividends and trade at lower valuations that reflect less growth potential or fundamental challenges that cause the market to discount the stock price relative to its assets or profitability.

The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.

Sources:

https://am.gs.com/en-us/institutions/insights/article/2026/us-small-caps-big-case-broadening-equity-exposure