Small caps starting to gain traction: Brooke Thackray

Summary

• Small cap stocks have recently shown improving performance after receiving less investor attention than large caps & technology stocks.
• The small cap sector, represented by the Russell 1000 Index, outperformed large caps from April 2025 to June 2026 following the "Liberation Day" tariff resolution.
• Recent outperformance resumed in October 2026, driven by a U.S. economy with 3.4% annualized GDP growth in Q3 2026 & a domestic focus that benefits from a stronger dollar.
• The U.S. dollar (DXY) has remained above the 100 level since early 2026, reaching 102.91, which supports small caps due to their domestic sales concentration.
• Falling interest rates are favorable for small caps as they rely more on short-to-mid-duration debt financing than large caps.
• The 10-year U.S. Treasury yield decreased sharply in October 2026 to 4.99%, coinciding with a rally in the small cap sector despite a general yield increase earlier in the year.
• Investors anticipate potential Federal Reserve rate hikes in December 2026, yet the 10-year yield may still decrease if the Fed prioritizes inflation control.
• Strong tailwinds continue to support small cap outperformance, creating a "stealth rally" that may persist despite being overlooked by some market participants.