Can Small-Cap Stock Success Continue Into Q2?

On the April 6, 2026, episode of The Morning Filter podcast, David Sekera and Susan Dziubinski share an update on small-cap stocks. Here is an excerpt from the show.

Small-Cap Strength in Q1

Susan Dziubinski: All right. In last week’s episode of the podcast, we discussed your second-quarter stock market outlook, but one topic we just didn’t have enough time for, but that we often talk about are small-cap stocks, so let’s cover that ground today. How did small-cap stocks do during the first quarter?

David Sekera: I actually pulled up the index numbers this morning. The Morningstar US Small Cap Index through last Friday is up essentially at 1% year to date. Not a huge return, but at least in the green, and on a relative value basis, that’s a very good return compared to the broad market. The Morningstar US Market overall is down 3.35%, and it’s really the large caps that took the brunt of the selloff thus far this year, down over 5%. Small caps are looking pretty good compared to the rest of the marketplace.

Are Small-Cap Stocks Attractively Valued Today?

Dziubinski: So then, how do they look, Dave, from a valuation perspective?

Sekera: I look at it in two different ways here. On an absolute basis, still very attractive, still the most attractive part of the marketplace by capitalization, trading at a 17% discount. However, on a relative value basis, they’re less attractive compared to the broad market and large caps, because the broad market and those large caps fell to the downside. With the market being at a 12% discount, you really don’t have as much of a range between the small caps and the broader market. Again, on a relative value basis, not as attractive as when we were really recommending them coming into this year and, in fact, most of last year.

Can Small-Cap Stock Success Continue Into Q2?

Dziubinski: Given economic conditions today and the uncertainty, do you think that small-cap stocks can continue to outperform?

Sekera: There are kind of two answers to this question. Over the longer term, yes, we still see the best value in small-cap stocks, but here in the shorter term, I think it’s going to be a little bit of a struggle for them to necessarily outperform the broader market too much. I think the market has recognized the better valuations in those small-cap stocks, but to some degree, that’s been playing out, and that valuation gap between small stocks and the rest of the market has narrowed to a very large degree compared to where it looked last year. When we talk about the macro dynamics in the marketplace, and we’ve talked about how, historically, small caps would do well when the Fed was easing, the economy’s rebounding after slowing, long-term rates were falling. That’s no longer the case now, like it was when we were recommending overweighting small caps in the past.

Lastly, depending on how bad things get in the private credit marketplace, that will, to some degree or another, reduce the financing that’s going to be available for small-cap stocks and raise their financing costs. That also, I think, in the short term could be a headwind for the small-cap space.

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