Small-Cap Stocks Step Out of Big Tech’s Shadow

Small-cap stocks are outperforming large-cap tech, offering a broader recovery driven by the US economy rather than AI. This marks a significant shift after five years where the Russell 2000 lagged the S&P 500.

Small-caps' earnings are improving across sectors like industrials and financials, which are more tied to domestic economic activity. With 68% of their revenue concentrated in the US, they provide diversification away from the AI trade. Despite recent gains, the Russell 2000's market value is still well below its historical footprint, suggesting further upside potential.

We should watch for persistent inflation and interest rate hikes as key risks. However, AI tools could also boost small-cap productivity. Active managers focusing on quality metrics can find opportunities in this space.