Small-cap stocks are making a quiet comeback—and investors may want to take notice.
According to a new report from LPL Financial, there are several compelling reasons to give this overlooked corner of the market another look.
“Small cap equities remain one of the most paradoxical asset classes—frequently dismissed yet frequently cited as a contrarian buying opportunity,” said Jeff Buchbinder, Chief Equity Strategist at LPL.
In short, small caps are cheap. The Russell 2000 index, which tracks smaller companies, trades at just over two times book value, while the large-cap Russell 1000 sits at more than five times.
The Russell 2000 has surged nearly 30% since early April, breaking out of a key technical pattern and pushing above important moving averages. Still, compared to large caps, small caps have more ground to make up. “Until the relative trend turns higher, it’s hard to make the case for sustainable small cap leadership,” the report noted.
Borrow big, pay less
While that may reflect the market’s confidence in large-cap earnings and AI-driven growth, it also raises questions about how much upside is left in the bigger names.
Recent policy changes may help close that gap. Under the One Big Beautiful Bill Act, companies can now fully deduct US-based research and development costs in the year they’re incurred—a reversal of the old rule that spread those deductions over five years. That’s good news for innovation-heavy small businesses, especially those investing in software or product development. The bill also restores full bonus depreciation and expands interest cost deductions, giving smaller firms more breathing room.
Small companies, which rely more heavily on borrowing, are also benefiting from calm credit markets. Spreads on corporate debt remain tight, and with the Fed expected to cut rates at least once or twice this year, financing remains relatively affordable.
But there’s a caveat: if the economy slows too much, those rate cuts might not be so helpful. “If weakness materializes, we could see spreads widen, negating the effects of lower baseline rates,” Buchbinder warned.
Broader market could mean bigger opportunity
There’s also been a noticeable shift in market leadership this year. Mega-cap tech stocks have taken a breather, creating room for other areas—like European equities, emerging markets, and yes, small caps—to shine. A weaker US dollar has helped non-US names, but if the greenback stabilizes, domestic small caps could be next in line to benefit.
Despite the improving picture, LPL isn’t rushing to overweight small caps just yet. The firm maintains a neutral stance on small-cap growth and a modest underweight on small-cap value. Buchbinder said the team is watching for signs of sustained economic growth and improved relative strength before getting more bullish.
“We believe Fed rate cuts driven by easing inflation (instead of economic growth deterioration) could positively impact borrowing costs and valuation models, though more so for small cap growth than small cap value,” he said.
Bottom line: small caps may be staging a comeback, but for now, LPL is keeping a balanced approach—while keeping one eye on the potential for a bigger move.