Video Transcript
Greg Czarnecki
Portfolio Specialist, Research Coordinator
U.S. Value Equity Team
Matt Fleming, CFA, Partner
Head of the U.S. Value Equity Team, Portfolio Manager
Mark Goodman, CFA
Portfolio Manager
U.S. Value Equity Team
Greg: We think 2026 has the potential to really benefit small- and SMID-cap value asset classes for a variety of different reasons.
Matt: The first is, in our opinion, smaller companies are actually coming out of an economic downturn. So, fundamentals are getting better, valuations are extremely cheap. And then historically, if you look, small caps have really benefited from Fed interest-rate cuts, which we’re seeing right now. I think 2026 is shaping up to be really what we think is sort of a classic small-cap rebound.
Greg: Given the prolonged underperformance of the small- and SMID-value asset class, we think the combination of earnings-growth profile reaccelerating and, also, the valuation disconnect between this segment and its larger-cap peers, should be particularly powerful. Much has been spoken in terms of the K-shaped economy, but there’s also been a K-shaped stock market in which large-cap momentum stocks have continued to outperform. We believe if there’s any reversion to the mean and a reacceleration of the domestic economy, this should benefit small-cap value and SMID-value stocks.
Mark: What excites me, looking ahead to 2026, is the opportunity for the markets to really broaden out from what’s been a very narrow, focused market and economy. I think the tax bill, in particular, has an opportunity to really kind of spur some growth for the middle-income consumer that’s been under so much pressure. And that, in turn, can really help drive a recovery in some of the stocks that have been left behind in this market over the last year.
Mark: I wouldn’t say there are particular themes we’re looking for. I’d say we’re really looking for those segments that have been under the most pressure and duress over the last year. But with how far the AI trade has really run, we’re seeing value and opportunities where the market has shunned companies like traditional cyclicals within industrials. Housing and building products companies that are kind of levered to lower interest rates and recovery in the housing market. Areas where the market has really kind of left behind in a very growth-led, AI-driven, narrow market over the last couple years.
Matt: We’re really excited about financials, in particular insurance, and in particular banks. If you look at insurance companies, unfortunately I think everybody knows their auto insurance bill is going up, their homeowner’s insurance, all sorts of things like that. So, the insurance companies have a tremendous amount of pricing power. And then the banks are particularly interesting in our mind because you’ve had a pretty benign credit environment. We think you’re going to start to see loan growth expand. And then depending on the bank, you could also see net interest margin expand as the Fed lowers rates. And then finally, we think there’s a pretty active appetite for mergers and acquisitions in banks right now.
Greg: We think this setup is particularly attractive in 2026 as we think about the reacceleration of the domestic economy and the potential for the reacceleration of loan growth.
Matt: I think the major risk is that it just takes longer for the rebound. We’ve seen that for some time. If you look at trucking stocks, for example, have been bouncing along the bottom of the economic cycle for really almost five years now. And so, it hasn’t gotten much worse, but candidly it has not gotten better. So, I think if you start to see a continued drawn-out recovery, that’s a risk. And then certainly if you look at macro factors such as potentially the Fed not cutting as much as investors expect, I think that could be a challenge as well.
Matt: But I think what’s different this time is the duration of underperformance in small relative to large is really at extreme levels. So, we think that does set up for a very nice scenario not only from a fundamental rebound, but also from a potential shift in assets and flows from large to small.
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