Core Viewpoint - Small-cap stocks are expected to outperform large-cap stocks in terms of earnings growth, with a projected 14% profit increase for the S&P 600 index compared to nearly 12% for the S&P 500 index [1] Group 1: Performance and Valuation - Small-cap stocks have lagged behind large-cap stocks, with the Russell 2000 index up 10% year-to-date, while the S&P 500 index has risen 17% and the Nasdaq 100 index has surged 21% [4] - The valuation gap between small-cap and large-cap stocks is described as the steepest in the past 40 years, making small-cap stocks historically cheap [4] - Investors have been withdrawing from small-cap stocks, with net outflows from the iShares Core S&P Small-Cap ETF occurring in all but two months of 2025 [6] Group 2: M&A Activity - Increased merger and acquisition (M&A) activity is anticipated to boost small-cap stocks, as many companies appear attractively valued relative to large-cap stocks [4] - The pace of M&A activity among Russell 3000 index constituents is expected to break records set in 1996, with high acquisition premiums often benefiting small-cap stock performance [6] - The current environment is seen as conducive to a resurgence in M&A activity, which could enhance the appeal of small-cap stocks [6] Group 3: Market Sentiment and Future Outlook - Analysts suggest that while small-cap stocks are currently undervalued, a catalyst is needed for a significant turnaround, which may take years to materialize [6] - The sentiment around small-cap stocks is cautious, with some experts indicating that a dramatic reversal in performance is not a consensus view in the market [6] - The potential for small-cap stocks to outperform large-cap stocks typically occurs during recovery phases following economic downturns [6]