Small-cap stocks have been the underdogs of Wall Street for years. While big names in tech and mega-cap companies have stolen the spotlight, smaller U.S. companies have quietly lagged behind. But according to Evercore ISI’s Julian Emanuel, that might be about to change, fast.
Emanuel believes small caps are so unloved that they’re actually due for a comeback because investor sentiment is on the downside. And when expectations are this low, even a little good news can light a fire.
Summer of Small-caps
So far this year, small caps haven’t had much to brag about. The Russell 2000 is down 3.8% while the S&P 500 is up more than 2%. But something interesting is happening in June. The Russell has started to bounce back, outperforming the S&P 500 with a 0.6% rise on Monday, compared to just 0.1% for its large-cap cousin.
Historically, June is a strong month for small caps thanks to the annual rebalancing of FTSE Russell indexes. That timing could help fuel what Emanuel calls a “sustainable stretch of outperformance.”
He’s not alone in the call. Last summer, Fundstrat’s Tom Lee predicted a massive 40% rally in what he dubbed the “summer of small caps.” That rally fizzled out, but the momentum is building again, and this time, the setup looks a bit stronger.
What’s Fueling This Potential Rally?
It’s not just seasonal optimism. Emanuel points to a few key reasons small caps might be ready to break out:
- Valuations are dirt cheap: Compared to large caps, small-cap stocks are trading way below their long-term average.
- The economy isn’t booming, but it’s not crashing either: A mild 0.9% GDP growth in 2025 means the Fed could cut rates again. That’s a big help for smaller firms, which tend to carry more floating-rate debt.
- Politics and policy could help: Easing trade tensions and President Trump’s budget bill may give these companies another push.
At the end of the day, small caps might finally have the perfect mix of timing, value, and momentum on their side. It’s early, but Wall Street is watching.
And this time, maybe you should, too.
