3 Reasons Small-Cap Stocks Could Outperform in 2026 -- and 1 Fund to Buy Now

Core Viewpoint - Small-cap stocks are expected to outperform large-cap stocks in 2026, reversing a 15-year trend of underperformance, as historical patterns suggest cycles of market leadership between small and large caps [2][5][6]. Performance Comparison - In 2025, small-cap stocks, represented by the Russell 2000, returned 12%, while the S&P 500 rose by 17%, indicating a slight underperformance [2]. - Historically, small caps have outperformed large caps by an average of 2.85% annually since 1927, with small caps winning two-thirds of the time over any 10-year period [3][4]. Historical Context - The S&P 500's average annual gain since 1927 is 10.37%, which would have turned an initial investment of $100 into $1.75 million, while including small caps' outperformance would increase that figure to $21.8 million [4]. - The current era of large-cap dominance is noted as the longest on record, lasting from 2011 to 2026 [5]. Future Outlook - Major financial institutions, including Vanguard and Invesco, forecast significant upside potential for small caps in 2026, with small caps being viewed as attractively valued [7]. - Analysts predict that the end of large-cap dominance may occur in 2026, with small caps poised to take the lead [6]. Factors Supporting Small-Cap Performance - Excessive valuations of large caps may lead to a downward pull on their performance, while small caps could benefit from falling interest rates, which are anticipated to decrease by late April 2026 [8]. - Small caps are more reliant on floating-rate debt, allowing them to refinance more easily at lower borrowing costs, enhancing their upside potential [9]. - Historically, small-cap companies have shown resilience during recessions, benefiting from lower interest rates and their ability to adapt to changing economic conditions [10]. Investment Vehicle - The iShares Russell 2000 ETF (NYSE: IWM) provides exposure to nearly 2,000 small-cap companies and has achieved average annual gains of 8.05% since its inception in May 2000 [11][12]. - The fund charges a management fee of 0.19%, which is lower than the industry average, making it a cost-effective option for investors looking to capitalize on a potential small-cap resurgence [13].