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Equities in Focus

Thoughts from our Equity Experts

 
January 2026

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AB's Capital Markets Outlook | 1Q.26

Keep an AI on the Prize
 

Join us for AB’s Capital Markets Outlook webcast, Keep an AI on the Prize, where our strategists and investment experts reveal the key forces shaping markets in 2026, including AI trade sustainability, labor markets, inflation, policy changes, and consumer sentiment. Don’t miss out!

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LATEST COMMENTARY

Small-Caps: From Laggards to Leaders

For much of the past decade, US equity markets have been dominated by large-cap (especially growth) stocks, leaving small-caps in the shadows. Advisors and clients alike have grown accustomed to the narrative that “bigger is better.” But the tide may be turning beyond a head fake rally.

 

Key Takeaways

  1. A Favorable Policy Backdrop Is in Place 
    Fed easing and the One Big Beautiful Bill Act are key tailwinds.

  2. Small-Caps Benefit Disproportionally from Lower Rates 
    Interest expenses fall on the bank and the variable-rate debt many small companies carr

  3. Discounted Valuations and Now Earnings Visibility 
    Attractive valuations are finally being accompanied by earnings growth expected to surpass large-caps.

 


A Strong Rotation Indeed 
 

Since June 30, 2025, small-caps have staged a notable comeback, with the Russell 2000 Index returning 22.00% versus the S&P 500 up 12.46% through January 28, 2026. This small-cap comeback has been driven by favorable policy factors, including: the One Big Beautiful Bill Act’s depreciation provisions, which could drive increased capital spending by corporations well beyond the AI ecosystem; and the potential for Fed easing, which would lower small-caps’ interest expense and lead to easier lending standards from banks, who are more frequent lenders to smaller businesses. As Display 1 shows, interest expense as a percentage of total debt is much higher for small- versus large-cap stocks, in part explaining small-caps’ rate sensitivity. And price-to-earnings multiples tend to get a lift during periods of Fed rate cutting, especially small-cap growth stocks (Display 2).  
 

Fundamentals for a Sustained Broadening 
 

Lower interest expenses could provide meaningful relief for these more indebted companies, improving margins and fueling earnings growth. In fact, the year-over-year earnings growth for small-cap stocks is expected to far outstrip that of large-caps, based on sequential consensus forecasts (Display 3). For so long, small- and mid-cap stocks have been overshadowed by the AI trade and a bifurcation in nominal earnings growth versus large-cap equities, with small-caps’ growth rate being inferior. These elements have led to small-caps trading at a substantial discount to large-cap stocks. 


Our View 


Attractive valuations are now being accompanied by a vastly improved earnings growth outlook, which if the latter is realized, provides a solid combination that may bolster an enduring equity market broadening. Despite their strong rally, we believe it’s not too late to rebalance back into or initiate a position in this long-unloved and less-crowded asset class. 

To learn more about AB’s equity investment solutions and to access other market insights, visit Equity Investments | AB

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