If there’s one conclusion we can draw from President Trump’s second term in office so far, it’s that while the direction of travel remains relatively fixed, this administration is willing to pivot quickly in the face of adversity. Seemingly little is set in tone, even though it might be presented as such when first introduced.

For investors, the investment landscape has undoubtedly changed. The previous investment regime was defined by low, stable inflation and persistently low interest rates, which fueled the rise of passive investing, characterized by momentum-driven strategies and an agnosticism for valuations. This regime looks increasingly like it will be defined by greater inflation volatility, increased geopolitical tensions, and, as a result, the need to adopt a more active portfolio management style. While investors should retain a focus on quality growth, they should also be paying increased attention to valuation as a margin of safety; valuation should help strike the delicate balance between nimbleness, adaptability, and fortitude.

In this economics report, William Blair’s Richard de Chazal, CFA, macro analyst, discusses the latest plot twists in the ongoing tariff saga, the market’s interpretations of those turns, and why small- and midcap stocks continue to look attractive over the medium to long term.

Life hasn’t been easy for small- and midcap equity portfolio managers in a market that’s been overwhelmingly large-cap focused for much of the last decade. This large-cap trend has been driven by a powerful combination of forces, including:

  • Globalization, global brand power, financialization, and massive global capital flows
  • Regulation has created a powerful moat for the large-cap companies
  • Low and stable rates of inflation and lower-for-longer interest rates, resulting in a sustained negative correlation between stocks and bonds
  • A boom in private markets following the global financial crisis, where lower interest rates encourage greater private asset accumulation
  • Rapid innovation has resulted in a winner-take-all mega-cap
  • Increasing momentum-driven passive investment

It would be sensible to expect more market volatility in the coming months and quarters. With that in mind, our analysts have put together a growing list of reasons why investors should, once again, turn their focus back to small- and midcap stocks.

For more information about our economics research, please contact us or your William Blair representative.