3 Sector ETFs & Stocks to Play in the Small-Cap Spectrum

Market Performance - Wall Street has shown mixed performance in 2026, with small-cap stocks outperforming large-cap stocks; S&P 500 gained 1.1%, Dow Jones rose 3.6%, Nasdaq Composite slipped 0.9%, while Russell 2000 surged 6.5% [1] Macro Environment - Major developments impacting markets include heightened geopolitical tensions, fluctuations in the U.S. dollar, disruptions from a winter storm, and the nomination of Kevin Warsh as the next Federal Reserve chair [2] Geopolitical Risks - Geopolitical uncertainty has increased due to U.S. actions involving Venezuela, renewed tensions with Iran, and policy disputes with European allies, benefiting small-cap stocks that generate most revenues domestically [3] Currency Impact - The U.S. dollar strengthened following Warsh's nomination, which supports smaller companies with limited foreign exposure and reduces currency translation risks, while large-cap companies may face challenges [4] Earnings Outlook - Small-cap earnings are recovering, with the S&P SmallCap 600 index projected to return to positive growth in 2025, expecting double-digit earnings expansion over the next two years [5] Sector Performance - The finance sector of the small-cap index S&P 600 is expected to see earnings growth of 26.7% in Q4 2025 and 33.9% in Q1 2026, driven by revenue growth of 9.6% and 8.2% respectively [7] - The aerospace sector is projected to log earnings growth of 48.7% in Q4 2025 and 40.1% in Q1 2026, supported by revenue increases of 17% and 12.3% respectively [11] - The industrials sector is expected to record earnings growth of 9.5% in Q4 2025 and 9% in Q1 2026, with revenue growth projected at 5.7% and 3.6% respectively [13] Investment Opportunities - Invesco S&P SmallCap Financials ETF (PSCF) is up 4% this year, while Peoples Bancorp Inc (PEBO) has increased by 13.4% [8] - U.S. Global Technology and Aerospace & Defense ETF (WAR) is up 4.8%, and Astronics (ATRO) has risen by 35.3% [12] - Invesco S&P SmallCap Industrials ETF (PSCI) is up 15.3%, and Proto Labs (PRLB) has increased by 30.8% [14]