Chart of the Week

Sizing up small caps

July 21, 2026

Time to Read: 3 mins

Small caps have outperformed this year despite the threat of higher interest rates, suggesting the rally is being driven by more than just diversification away from large cap tech stocks. Improving earnings expectations and a resilient U.S. economy support our view that small caps have further upside from here.

Enlarge

Despite the risk that war-driven energy inflation could keep interest rates higher for longer — or cause the Federal Reserve to tighten monetary policy — small cap stocks have been among the best-performing asset classes year to date. That is especially notable because small caps are typically one of the most interest-rate-sensitive areas of the market.

While some investors are using small caps to diversify beyond crowded large cap tech leadership, the fundamentals also appear to justify the rally. After a period of negative earnings growth in 2023 and 2024, small cap earnings growth recovered to 14% in 2025 and is expected to accelerate to 20% this year and 18% next year. That trajectory demonstrates a meaningful rebound in profit growth and supports the case for higher valuations. Small caps also continue to benefit from a resilient U.S. economy because of their more domestic orientation.

We therefore believe small caps have further upside from current levels. While rate volatility remains a risk, improving earnings and a broadening market backdrop should continue to support the group. As a result, we advise clients to consider adding exposure to small cap companies within a globally diversified equity allocation.

Chart of the Week | Macroeconomic

Can the bull run in corporate margins continue?

Higher inflation and elevated interest rates typically weigh on corporate profitability, yet corporate margins continue to climb to record highs. While that strength is evident both in the U.S. and abroad, U.S. outperformance versus Europe is now the widest on record. Stronger margins have helped contribute to better-than-expected earnings and reinforce U.S. equity leadership. The question now is whether that strength can persist?

Chart of the Week | Macroeconomic

Higher yields, but lower sensitivity

Higher interest rates have become a frequently cited risk to corporate earnings and the economy. The conventional thinking is straightforward: when borrowing costs rise, companies face higher interest expenses, profits come under pressure, and economic growth slows. While there is truth to that relationship, the current cycle may differ from investors’ expectations.

Chart of the Week | Macroeconomic

Is AI productivity hiding in the data?

Both the dot-com era and the rise of artificial intelligence suggest that early productivity data can understate the actual economic impact of transformative technologies. In the case of the internet, later revisions to productivity gains surpassed early estimates. The same may prove true for AI, implying stronger support for growth.

Chart of the Week | Macroeconomic

History of stocks after the fed hikes

Sticky inflation and resilient growth have revived monetary tightening, increasing the risk of higher-for-longer rates and near-term volatility. We continue to believe economic resilience and strong corporate profits should continue to provide a favorable backdrop for stocks, and would use periods of market weakness to add selectively to equities. Additionally, owning real assets can help hedge against inflation.