Five factors that can drive US small-cap earnings growth

US small-caps are emerging from a long period of underperformance, with 2025 returns now outpacing large-caps and signaling a turn in both sentiment and fundamentals. Easing financial conditions, supportive tax changes, and incentives for capital investment are beginning to flow through to earnings, particularly for more leveraged and domestically focused businesses. Structural trends such as supply-chain reshoring and broader adoption of AI are also creating new avenues for productivity gains and margin expansion that may be underappreciated by the market.

At the same time, potential deregulation could further lower fixed compliance costs that disproportionately burden smaller companies. While valuations remain attractive relative to large-caps, wide dispersion within the asset class underscores the importance of careful security selection focused on balance sheet quality, pricing power, and management execution.