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Capital Ideas™ 
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Categories
Chart in Focus
Smid-cap stocks gain momentum as market broadens
Roz Hongsaranagon
Equity Portfolio Manager
Kent Chan
Equity Investment Director
February 18, 2026

As market leadership shows early signs of broadening beyond the Magnificent Seven, small- and mid-cap (SMID) stocks are emerging as an increasingly attractive hunting ground, offering investors a wider opportunity set.


Although investors may continue to consider the broader AI-related universe, equity selection is becoming more crucial. As of February 12, 2026, the Russell 2500 Index has produced a total return of 6.2% versus the S&P 500 down 0.2%, year-to-date. And the scope for earnings revisions is increasingly favoring the small- to mid‑cap segment of the U.S. market.


Earnings revisions are gaining ground

Smaller-cap equities have historically tended toward unpredictability, producing volatile return patterns during market dislocations. However, the blending of small- and mid-cap exposure can help improve diversification and return potential as market conditions evolve. For investors seeking small-cap participation with a more balanced risk profile, smid-cap stocks offer a thoughtful approach. Mid-cap stocks on their own present a strong case: They often pair the innovation and growth characteristics of smaller companies with more scale, balance sheet strength and resiliency found in larger firms.


One supporting factor for smid-cap stocks is the Federal Reserve’s move to cut interest rates last year. Even amid expectations for a reduced pace of cuts in 2026, current rates are more accommodative for non-mega-cap firms that are more sensitive to economic conditions. For now, the economic backdrop appears stable. Barring a drop in U.S. gross domestic product, smid-caps could fare better than in previous years.


Certain provisions in the One Big Beautiful Bill Act, including the restoration of 100% bonus depreciation and full expensing for research and development, could support a range of sectors, particularly industrials and financials. Combined with the continued push for U.S. reshoring and domestic manufacturing, there’s a constructive backdrop for more cyclical, capital-intensive areas of the market. U.S. mid-caps may be particularly well positioned given their direct exposure to the infrastructure buildout, where active equity selection is likely to be critical.  


Roz Hongsaranagon is an equity portfolio manager with 23 years of investment industry experience (as of 12/31/2025). She holds a bachelor’s degree in international relations & economics from Brown University.

Kent Chan is an equity investment director with 34 years of investment industry experience (as of 12/31/2025). He holds a bachelor’s degree in political economics from the University of California, Berkeley.

Learn more about
Chart in Focus
U.S. Equities
Markets & Economy

Past results are not predictive of results in future periods.

The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 7% of the total market capitalization of that index, as of the most recent reconstitution. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 2500™ Index measures the performance of the small to midcap segment of the US equity universe, commonly referred to as smid cap. The Russell 2500 Index is a subset of the Russell 3000® Index. It includes approximately 2500 of the smallest securities based on a combination of their market cap and current index membership.

 

S&P 500 Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.


The Magnificent Seven refers to key S&P 500 firms that have played a crucial role in driving the market's growth. The companies are Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla.

100% bonus depreciation refers to a section of the One Big Beautiful Bill Act which states: For most qualifying business property bought and put into use after January 19, 2025, businesses can now deduct 100% of the cost in the first year. 

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