Rate cuts, strong earnings, attractive valuations, and dealmaking create a compelling backdrop for small-cap equities globally. While conditions are supportive, skilled active management is key to turning these tailwinds into superior returns.

Key Takeaways 

1 Beta Boost 

We believe small caps present a strong investment opportunity. Easing cycles have historically been supportive given the sensitivity of small caps to interest rates. Valuations, including US and international small caps, remain attractive, and earnings growth is set to accelerate. A resurgence in dealmaking is injecting further optimism into the market.

2 An Alpha-Rich Environment 

The small-cap market demands a more nuanced investment approach than simply chasing beta. Market inefficiencies and limited analyst coverage create opportunities for skilled managers to identify mispriced stocks and uncover hidden gems. We believe there may be opportunities in sectors like defense & aerospace, tech and resilient consumer segments, and healthcare.

3 Steering Through Market Risks 

We believe small-cap investing can offer strong alpha potential but comes with higher risks, including greater volatility and lower liquidity. Active management is essential to distinguish high-potential disruptors from riskier names, especially as meme stock volatility and unprofitable companies remain prevalent in the small-cap universe.

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