A breakout year for US small caps?
US small caps could be gearing up for a meaningful comeback in 2026 – and the charts are starting to confirm it.
In my last video, I outlined five different macro factors that I think support the US economy and the US markets this year. But you should always relate anything you hear about the markets to what’s actually going on in the markets.
I alluded to that in the last video with US banking stocks, where the index showed it was in a strong uptrend. We can do the same thing today with the copper price.
If we bring up a chart of copper, you can see it has broken into new all-time highs recently. That’s a very good signal for the global economy. Some people even call copper “Doctor Copper” because it’s seen as a signal of the health of industry and construction around the world. That’s another encouraging sign.
What the charts are telling us
Another chart we can look at is the Russell 2000 index. That’s an index of US small-cap stocks. What do we see? It has broken strongly into a new all-time high this year.
Financial commentator Simon Ree recently posted on LinkedIn: investors don’t buy small caps if they expect a recession – they buy them when they expect economic re-acceleration. This is a classic pro-growth move that defies the bear narrative.
I agree. But we can’t take one comment at face value. So is there a particular reason we can identify for why investors are betting strongly on US small caps?
Why earnings growth matters
If we bring up another chart, you can see that the US small-cap sector has the highest earnings growth via consensus estimates for 2026. That earnings growth should be a very powerful tailwind for the sector this year.
For broader context, US small caps have underperformed large caps since 2021. That’s five years of underperformance. I’ve also seen a stat suggesting they’ve underperformed in eight of the last 10 years.
So this could be a notable shift away from the “Mag 7” and the biggest stocks in the US market, towards smaller companies that are more responsive to the strongest stimulus in the US economy – and that can generate the higher earnings growth the market wants to see.
The missing ingredient
The noted small-cap investors at Ophir Fund Management, which has a fantastic track record, describe earnings growth in the US small-cap sector as the “missing ingredient” behind the last five years of underperformance.
But that could be about to change. In their latest investment newsletter, they shared a chart demonstrating how this earnings dynamic is shifting.
Here’s a quote I picked out:
“When combined with improving momentum in early-cycle sectors, a supportive economic backdrop and broader market participation, this emerging earnings outperformance represents the final ingredient needed to support sustained small-cap outperformance.”
Of course, all investment carries risks. Please don’t treat this as a recommendation – it’s simply an idea for you to explore. There looks to be opportunity across both the US and Australian markets, which is what we’re exploring at Marcus Today.