US small caps roll on amid increased volatility

Markets are contending with a rare mix of slowing growth, sticky inflation, and heightened geopolitical risk, which has driven volatility higher early in 2026. Yet small- and micro-cap equities have shown notable resilience, maintaining leadership since last April’s lows despite rate uncertainty, renewed tariff concerns, and AI-related selloffs. The authors argue that the key is to look beyond headlines to second-order effects such as energy costs, inflation expectations, credit conditions, and the health of domestic demand.

In their view, periods like this often create attractive entry points into high-quality small caps with strong balance sheets, pricing power, and durable competitive advantages. They see accelerating earnings growth and compelling valuations as ongoing supports for small-cap leadership and believe that active management can add particular value now by using volatility to selectively build positions for long-term returns.