This Expert Says Small Caps Will Outperform This Year—and Two More 'Surprises' to Watch

Group 1 - The outlook for small-cap stocks is expected to improve this year, with predictions of a "positive surprise" according to State Street's Michael Arone [1] - Small-cap stocks, defined as those with market capitalizations below $2 billion, have underperformed large-cap stocks for the past nine years, but this trend may change in 2026 [1] - Investors have withdrawn approximately $12 billion from small-cap ETFs over the past year, indicating a potential shift in sentiment as the Russell 2000 index has risen 8% year-to-date [1] Group 2 - Healthcare stocks are predicted to outperform the broader market, with the sector experiencing net inflows of only $537 million in the past year, compared to $10.6 billion in the industrials sector [1] - The Health Care Select Sector SPDR ETF has produced the second-lowest returns among sector funds over the past five years, suggesting a compelling investment opportunity due to depressed valuations [1] - Historical trends indicate that healthcare stocks tend to perform well in mid-term election years, which may bode well for the sector in 2026 [1] Group 3 - Expectations of lower interest rates are favorable for small-cap companies, as declining interest expenses are anticipated to boost profitability [1] - The Federal Reserve is not expected to lower rates until June, when a new chair may take over, impacting market dynamics [1] - Inflation is expected to undershoot expectations, with predictions of tariff-related price increases diminishing by mid-year [1]