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Investing.com -- Bank of America analysts told investors in a note Tuesday that small caps are positioned for a “big recovery” in 2026, arguing that five bullish forces are setting the stage for outperformance after a difficult start to 2025.
Jill Carey Hall, the firm’s equity and quant strategist, wrote that BofA remains “bullish on small caps in 2026, expecting small caps to outperform mid and large caps.”
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According to BofA, the first key driver is earnings.
The firm wrote that “the long-awaited profits rebound is here,” with consensus expecting “+18% EPS growth for small caps vs. 16% for mid and 13% for large in ‘26.”
BofA added that “revisions have also shifted more favorably for small vs. mid.”
The second theme is monetary policy. BofA’s economists expect “three more rate cuts between now and the end of next year,” which the bank says should help reduce refinancing pressures.
Third, analysts highlight that the “capex cycle benefits small caps,” noting that sales growth for the group “has been highly correlated to US capex growth – and we are bullish on capex in 2026.”
Fourth, potential tariff and regulatory relief could ease a key overhang. BofA said “tariff-related uncertainty plagued small caps in early ‘25” but that “potential relief (exemptions, IEEPA challenges) would be most positive for small caps given their thinner margins.”
The fifth theme is positioning and valuation. BofA wrote that “multi-cap managers are very underweight small caps,” while the group remains “the cheapest part of the market” with “momentum in inflows.”
Key risks include a weak manufacturing backdrop or “the onset of a credit cycle,” BofA wrote.