Core Insights - Small cap stocks, defined as companies with market values between approximately $300 million and $2 billion, are known for their potential to deliver significant gains but can also be volatile during uncertain times [1][2] Economic Conditions - Small caps tend to perform well during economic expansions, as they are more focused on domestic markets, making their success closely tied to local economic health [2] - The post-pandemic recovery in 2020 and 2021 saw a surge in U.S. small caps, which outperformed larger companies due to rebounding domestic demand [2] Labor Market Influence - A strong labor market positively impacts small cap performance, as lower unemployment rates lead to increased consumer spending, benefiting sectors like retail and hospitality where small caps are prevalent [3] Interest Rates - Small caps are more sensitive to interest rates, as they often rely on borrowing for growth. Low rates facilitate investment and hiring, while rising rates can hinder growth [4] - Predictability in interest rates from central banks boosts investor confidence, further benefiting small caps [4] Public Policy Impact - Government interventions such as tax incentives, deregulation, and fiscal stimulus can provide significant support to small businesses, enhancing their recovery and growth prospects [5] Valuation Dynamics - After periods of underperformance, small caps may appear undervalued compared to large caps, attracting value investors when fundamentals improve [6] Multi-Factor Catalysts - A small cap catch-up is typically driven by a combination of factors including economic growth, favorable monetary policy, strong labor markets, attractive valuations, and changing investor risk perceptions [7]