Setup for small cap earnings growth in 2026 looks stronger, says market strategist

Core Viewpoint - The Russell 2000 has experienced significant gains, reaching all-time highs and is expected to continue its positive trend into 2026, particularly benefiting from lower interest rates and economic sensitivity [1][2]. Small Cap Outlook - Small caps are anticipated to outperform larger caps due to their economic sensitivity and the favorable impact of lower interest rates on their borrowing costs [2]. - Despite a confusing year where low-quality small cap companies have outperformed, the long-term outlook remains positive for small caps, especially as earnings growth becomes more pronounced [3][4]. Investment Opportunities - Companies identified as potential investment opportunities include: - Ali's, a discount value retailer, which is well-positioned to meet consumer demand for value across income spectrums [4]. - LMT, a healthcare company with differentiated products for vascular surgeons, showing strong pricing and margin potential [5]. - Mullis, a company acquiring top talent in private equity, positioned to benefit from a favorable regulatory environment and potential earnings growth [7]. Economic Considerations - The economic backdrop for small caps is generally positive, but concerns exist regarding the potential for rising interest rates and unemployment, which could hinder small cap performance in 2026 [9].