Core Viewpoint - The small-cap sector is showing significant momentum, with the S&P 500 up 17.1% and the Russell 2000 up 14.8%, indicating a potential for strong earnings growth in 2026 [1] Small Cap Performance - Small caps have experienced a profits recovery, with positive growth and upward revisions in earnings expectations [3][4] - Historical data suggests that after significant moves in the Russell 2000, there is a tendency for continued positive performance, with a 29% increase expected a year later [5] Investor Behavior - There is a notable increase in buying activity from various investor types, including retail and institutional investors, driven by the momentum in small caps [6] - The supportive Federal Reserve policy, including rate cuts, is beneficial for small-cap companies that are more leveraged [7] Market Conditions - The overall market sentiment has improved due to reduced uncertainty regarding tariffs and favorable earnings recovery [8][9] - M&A activity is increasing, particularly in the healthcare sector, which is positively impacting small-cap sentiment [9] Valuation Insights - While small caps are trading slightly above average valuation multiples, micro caps are trading 80% above average on sales multiples, indicating potential overvaluation in the micro-cap segment [11] - The expectation is for small caps to outperform larger caps, with earnings growth driving returns rather than price appreciation [16] Earnings Growth Expectations - Earnings growth for small caps is projected to be around 20%, compared to mid to low teens for large caps, suggesting better returns for small caps in the upcoming year [16]