This article was issued and approved by Square Mile Investment Services Limited which is registered in England and Wales (08743370) and is authorised and regulated by the Financial Conduct Authority.

Easter is traditionally associated with renewal or fresh beginnings. And this year, within the investment world, global small caps may be the asset class undergoing its own rebirth.

Having been trading in the shadows of large and mega caps for several years now, we are now entering a phase where the prevailing backdrop could finally see a revival in small sized companies. Macroeconomic conditions are improving; valuations are now at attractive levels and strengthening earnings momentum all point to a rebound. 

While this is good to see, it’s also vital to remember the recovery is unlikely to be uniform. Small-cap markets have long been characterised by wide performance dispersion, lower liquidity and greater volatility than their large-cap counterparts. As a result, investors looking to capture upside will likely need a more active, selective approach rather than relying solely on broad passive exposure.

Key takeaways

• After several years of underperformance, improving macroeconomic conditions and attractive valuations suggest small-cap equities may be entering a more favourable phase of the market cycle.
• Small caps offer strong earnings leverage to economic growth and should benefit from long-term structural trends such as AI, defence and infrastructure.
• Lower liquidity, wide-ranging performance and higher volatility mean active management and careful stock selection are essential to capture the right opportunities within the small-cap universe.

A more supportive backdrop

Historically, small-cap equities perform well during the early stages of economic growth. That’s because smaller companies tend to be more sensitive to shifts in economic activity than their larger peers, as even modest improvements in demand can translate into much stronger growth in revenues and profits. 

And, encouragingly, signs of this cyclical improvement are beginning to appear. Global growth has shown renewed resilience, corporate earnings expectations have begun to stabilise and capital market activity is gradually returning after a more subdued period. For smaller companies, which are often more reliant on access to capital and credit markets, these developments can provide a meaningful lift to confidence and growth prospects.

Compelling valuations

Current valuations further strengthen the argument that small caps may be approaching a more interesting point in the cycle. In the U.S., for example, profitable small-cap companies are currently trading at discounts close to historic extremes. While valuation premiums enjoyed by the Magnificent 7 may have been justified by their strong earnings growth, the scale of the gap suggests that much of the small-cap universe has been overlooked.

Meanwhile, outside the U.S., the picture is notable as well. International small caps are now trading in line with their large-cap counterparts, despite historically commanding a valuation premium. For long-term investors, this represents an attractive starting point for an asset class that has traditionally offered both higher growth potential and greater exposure to domestic economic expansion.

Multi-thematic exposure

The composition of the modern small-cap universe also offers important exposure to a diverse range of investment themes. While many smaller companies operate in cyclical industries such as industrials, financials and consumer discretionary, others are closely aligned with some of the structural trends shaping the global economy. Namely, AI, defence spending, infrastructure investment and evolving consumer behaviour patterns. Crucially, these are all represented within the small-cap universe. In fact, in many cases, it is small companies that provide the specialist technologies, niche services or supply-chain expertise that underpin these broader themes.

Remaining selective

Of course, not all small caps will react positively, even against an improving backdrop. The gap between the strongest and weakest performers in small-cap markets is typically far wider than in large-cap indices. 

For example, in 2025, the spread between the top and bottom 50 stocks in the Russell 2000 was nearly three times greater than in the S&P 500 . These figures highlight an important factor to remember: while some small companies can deliver exceptional growth, others will struggle. This dispersion reinforces the importance of careful company selection. Picking names with durable earnings growth, resilient balance sheets and capable management teams is vital.

The challenge of liquidity and volatility

Liquidity is another factor to consider when investing in small caps vs large caps. As shares in smaller companies tend to trade less frequently, price movements can be amplified during periods of market stress. Short-term volatility can spike at these moments, so broad index exposure can be less effective in capturing the true potential of the asset class. 

However, for patient investors willing to navigate these characteristics, small caps remain an important part of the global equity landscape. In the U.S. alone, they account for around 10% of the total market cap . And, of course, every large company was once a small one. Investing in smaller businesses, therefore, provides the opportunity to participate in the early stages of corporate growth and innovation. 

As Easter reminds us, renewal is a recurring theme in markets. After years spent in the shadow of large caps, small caps may once be approaching a period of revival, where taking a considered, selective approach will be essential. 

Important Information
This document is marketing material issued and approved by Square Mile Investment Services Limited ("SMIS") which is registered in England and Wales (08743370) and is authorised and regulated by the Financial Conduct Authority. The independent research is provided by Square Mile Investment Consulting and Research Limited ("SMICR") which is not authorised or regulated by the Financial Conduct Authority and does not undertake regulated activities. Titan Square Mile is a trading style of SMIS and SMICR. SMIS and SMICR are wholly owned subsidiaries of Titan Wealth Holdings Limited (Registered Address: 101 Wigmore Street, London, W1U 1QU).

This document is aimed at professional advisers and regulated firms only and should not be passed on to or relied upon by any other persons. It is not intended for retail investors, who should obtain professional or specialist advice before taking, or refraining from, any action on the basis of this document. It is published by, and remains the copyright of, SMIS. SMIS makes no warranties or representations regarding the accuracy or completeness of the information contained herein. This information represents the views and forecasts of SMIS at the date of issue but may be subject to change without reference or notification to you. This document does not constitute investment advice, a recommendation regarding investments or financial advice in any way and shall not constitute a regulated activity for the purposes of the Financial Services and Markets Act 2000. Should you undertake any investment activity based on information contained herein, you do so entirely at your own risk and SMIS shall have no liability whatsoever for any loss, damage, costs or expenses incurred or suffered by you as a result. SMIS does not accept any responsibility for errors, inaccuracies, omissions, or any inconsistencies herein. Past performance is not an indication of future performance.
Date: March 2026