The Royce Roundtable: US small-cap forecast—more volatility and cautious optimism

In the ever-evolving investment landscape, the second quarter of 2025 showcased a varied performance across major US indexes, highlighting both opportunities and challenges for investors. The resurgence in micro-cap stocks and the strong performance of growth-oriented small caps underscore potential areas for growth, despite ongoing volatility sparked by geopolitical tensions and tariff uncertainties. This period also saw increased interest in sectors like nuclear energy and healthcare innovation, driven by advancements in AI and personalized medicine.

As we look ahead to the remainder of 2025, uncertainty looms large due to geopolitical risks, potential economic shifts from tariffs, and domestic fiscal policies. Nevertheless, there is cautious optimism among investors about long-term prospects for small caps that remain relatively undervalued compared to their larger counterparts. While short-term market fluctuations may pose challenges, strategic allocations during these times can yield significant returns as active management continues to uncover valuable investment opportunities amidst broader economic trends.