In July 2025, we again made the case for tilting toward small- and midcap stocks, a shift that worked very well from then to July 2026—the S&P 600 outperformed the S&P 500 by a wide 12.2 percentage points (29.9% vs. 17.7%), while the midcaps were flat with the large caps (up 18.0%). From the end of July to mid-October, however, that performance has tailed off, with the small-cap stocks declining by 4% and the midcaps by 2.7%, against the S&P 500 increasing by 3.1%. However, the increase in market volatility over the last few weeks has once again brought out the best in the smaller-cap stocks, showing them to be a source of stability and growth, while the large-cap indices have struggled. In this Economics Weekly, Richard de Chazal discusses why we maintain our view that we are in a small-cap stock cycle, and why investors should once again shift their gaze in this direction.
