While headlines continue to shine a spotlight on tech mega-caps and the AI boom, a quieter, but potentially more enduring story is playing out beneath the surface: U.S. small- and mid-cap stocks are positioning themselves as the next big market opportunity. Matt Mahon, Portfolio Manager, T. Rowe Price US Smaller Companies Equity Fund, highlights this by explaining that for over a year, high beta speculative stocks have dominated returns, echoing the narrow leadership of the dot-com era. But history teaches us that such frenzies rarely last long. As valuations rise and momentum fades, capital doesn’t vanish, but moves elsewhere. And more and more often it moves towards small caps.
US stocks: the silent revolution of small and mid caps
Small- and mid-cap companies trade at steep discounts to their large-cap counterparts. Many have prices at 20-year lows, offering fertile ground for long-term investors. These companies, which make up 70% of U.S. listed companies but only 20% of market capitalization, are often overlooked despite their cyclical strength and pricing power in inflationary environments. Unlike the S&P 500, which is heavily weighted towards the technology sector, small caps have greater exposure to sectors such as industrials, energy, materials and healthcare, which benefit from inflation. It is important to highlight that not all small caps are speculative. Many are well-managed, long-lasting companies with solid fundamentals.
Companies like Molina Healthcare, a cost-efficient provider that is gaining market share, and Teledyne Technologies, a leader in digital imaging and defense, are examples of long-term compound growth companies that thrive in disciplined portfolios. Even legacy names like International Paper are benefiting from industry consolidation and pricing power.
T. Rowe Price’s view
Recent data from the Russell 2500 Index shows a stark divergence: While the index returned 9.91% over the past year, the highest beta decile rose 63.36% (Financial data and analytics provider FactSet. Copyright 2025 FactSet. All Rights Reserved), even though most of the stocks included had not gained. This speculative bias mirrors past cycles, where quality small caps ultimately led to sustainable rebounds. We are already capitalizing on this shift, the expert continues. With a bottom-up, sector-neutral approach, the fund targets North American small caps, prioritizing time arbitrage and fundamentals over short-term enthusiasm.
What prospects?
As macroeconomic challenges persist and large-cap technology valuation concerns mount, small-cap stocks offer a differentiated, undervalued and strategically attractive path forward. For patient investors with a multi-year horizon, this overlooked segment could not only be a contrarian bet, but could become the market’s next major player.
