Concentration risk, geopolitical risk, the return of inflationary pressure amid rising debt — it’s been a stressful year for investors already. Indeed, there are more negative stories than positive when it comes to investing. Still, there are opportunities, with small-caps potentially a sleeper hit that could surprise investors when they look back on their portfolios in January. Here are three reasons small-caps could make a big impact this year.
Small-Caps May See Outsized Benefits From AI Advancements
Markets are concerned about the profitability of key names in the AI revolution, yes. However, perhaps the bigger risk is the concentration of the big tech names. Last year, the AI hyperscalers produced an outsized return in the S&P 500, and many investors rely heavily on those stocks in their core allocations.
While that may limit investor interest in adding more exposure to those huge names, there are other ways to benefit from the AI revolution. Small-caps in and outside of technology spaces will benefit from AI to operate with greater efficiency. AI agent help may even produce even bigger relative benefits than for the biggest companies, following the initial wave of large-cap adoption.
See more: Amid AI Concentration Risk, TTEQ Spikes in Last Month
“While the early stages of the artificial intelligence (AI) build‑out primarily favored large‑cap technology companies, we increasingly are seeing demand spill over to smaller firms,” wrote T. Rowe Price capital markets strategist Tim Murray in a recent analysis.
“Some small‑cap companies are benefiting directly from AI‑related infrastructure spending, while others are seeing productivity gains from implementing AI within their own business processes,” he added.
Small-Caps Are Seeing Faster Earnings Growth
Murray added that small-caps are also seeing faster earnings growth. Small-cap earnings rebounded sharply at the start of 2026, he explained, benefitting from a calming tariff outlook and fiscal benefits from the OBBA.
“After nearly three years of poor relative performance, there is now clear evidence that U.S. small‑cap stocks are experiencing a renaissance,” he wrote. “Performance has improved and, more importantly, earnings growth has pivoted in a supportive direction.”
What’s more, those firms could help drive a recovery from a second half downturn caused by rising energy prices. Smaller companies tend to lead recovery periods, potentially riding these existing trends in to the latter half of 2026.
Rising Active ETFs Can Make an Especially Big Impact in Small-Caps
Active ETFs provide a powerful toolset to get after small-cap upside, specifically. Active management can closely scrutinize smaller firms, applying a bottom-up approach that finds contenders rather than just those with the biggest market caps.
The T. Rowe Price Small-Mid Cap ETF (TMSL ) charges 55 basis points to actively invest in small- and midcap stocks. The ETF, which will hit its key three-year ETF milestone this June, has returned 33.4% over the last twelve months, according to ETF Database data. At the same time, it has also added nearly a billion in net inflows over the last year.
Taken together, active ETFs like TMSL may make for intriguing options to get small-cap exposure this year. While headlines remain focused on stressors, smaller firms could prove a savvy investment with some rising trends boosting their prospects.
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