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Patience Powered by Fundamental Research

After nearly 15 years of large cap dominance, investors are asking: what could drive the next market cycle?

Several potential catalysts are coming into focus:

Earnings troughing and reaccelerating
Slower growth rates by the “AI 5”
Rising M&A activity
Increased capex spending

These shifts suggest that small caps may be well-positioned to benefit from a broadening of market leadership, creating potential entry points for long-term investors.

Small Cap Earnings and Sales Growth Expectations

As of June 30, 2025

Source: Furey Research Partners; FactSet as of 6/30/2025.

Large-Cap Cycles Typically Peak at Market Tops Crowded with Mega Caps

As of June 30, 2025

Sources: eVestment; FactSet; Furey Research Partners. The 10-Year Rolling Excess Return represents the annualized return of the Russell 2000 Index over the trailing 10-year period minus the annualized return of the S&P 500 Index over the same period. Rolling periods are calculated monthly based on trailing 10-year return data for these indices from 1979 to June 2025. Historical returns prior to 1979 represent the Ibbotson SBBI US Small Cap Stocks and the Ibbotson SBBI US Large Cap Stocks indices.

Solid M&A Activity Down Cap Helps Small Cap’s Performance

As of June 30, 2025

Source: Jefferies; FTSE Russell; FactSet; Bloomberg as of 6/30/2025.

US Capex Growth is More Correlated with SC Sales Growth

Small cap stocks have a relatively higher historical correlation with capex than large cap stocks

Correlation of US capex growth with small cap (Russell 2000) and large cap (S&P 500) sales growth, 1985-3Q24.

Source: BofA US Equity & US Quant Strategy, FactSet, Haver Analytics, 9/30/2024.

For more small caps observations click here.

Disclosures

The opinions expressed herein are those of Aristotle Capital Boston (Aristotle Boston) and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Aristotle Boston reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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Past performance is not indicative of future results. The information provided in this report should not be considered financial advice or a recommendation to purchase or sell any particular security.

Differing historical time periods are selected throughout the presentation as we believe specific periods provide the most informative historical analog for the concepts presented.

The Russell 2000® Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The S&P 500 Index is the Standard & Poor’s Composite Index and is a widely recognized, unmanaged index of common stock prices. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization. The volatility (beta) of the portfolios may be greater or less than the benchmarks. It is not possible to invest directly in these indices.

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