Growing demand for new infrastructure, especially to upgrade supply chains and energy access, should also be supportive. Smaller companies, with their improved cost structures, will now be able to meet this demand on a more even footing with larger, globally focused companies, in our view.
Onshoring Levels the Field vs. Large Caps
We believe a new paradigm is emerging with the potential to undercut the stubborn dynamic that weighed on small-cap performance for the last decade. Globalization has long benefited mostly US large-cap companies, which naturally were better positioned to leverage lower operating costs and fast-growing markets overseas.
In a more domestically focused US economy, small caps aren’t as disadvantaged in terms of cost structure and market scale. In fact, the playing field is leveling as supply chains and trade patterns lean toward US products and manufacturing. US reliance on Chinese imports, for example, is about half of what it was in 2015, while more money than ever is going to factory construction stateside.
Moreover, US manufacturing has begun to show signs of recovery. The Institute for Supply Management’s Purchasing Managers Index reached 52.4 in February, the second consecutive month it has surpassed 50, which indicates expansion. The expanding economy will likely need significant investments, too, given that the American Society of Civil Engineers pegs the country’s infrastructure—from roads and bridges to water pipes and treatment plants—at near or past life expectancy.
We think the need for massive infrastructure investment—and the fact that domestic companies are becoming equipped and incentivized to step up—is another structural tailwind, especially for smaller industrial and tech firms overshadowed by the AI rush.
US Policy Also Supportive
Ongoing policy changes are also accelerating the US economic transition. The One Big Beautiful Bill Act (OBBBA), for instance, should pump significant fiscal stimulus into its economy in 2026 while the Fed’s expected course of lowering interest rates will also help.
Falling interest rates are powerful catalysts that lower the cost of variable debt, which is generally higher among small-cap companies (Display). Monetary policy easing could also free up more small-company loans, as banks tend to loosen lending requirements when debt becomes cheaper. History suggests that small-cap valuations tend to rise during Fed easing periods, and 12-month trailing price-to-earnings upticks are already underway since 2024.
