Francis Gannon

Small-cap stocks are in a sweet spot that will last for a period of time. Earnings have turned positive and are expected to grow strongly, potentially exceeding large-cap earnings by late 2025 into 2027. Multiple tailwinds are driving this: the Federal Reserve has eased, lowering borrowing costs; the AI buildout is boosting small-cap companies through both productivity gains and hard-asset demand (e.g., data center components, air conditioning); reshoring trends continue to lift earnings; deregulation is especially powerful for smaller firms; and the tax act allowing 100% depreciation on capex and R&D is a powerful tailwind. Historically, when small caps start to outperform after a decade of large-cap dominance, they tend to outperform for the next decade. Moreover, flows into small-cap ETFs remain negative, meaning skepticism is still high and there is more upside as the 'show me' narrative shifts to sustained earnings delivery.