Smart Money Tilts Toward U.S. Small Caps

Institutional positioning has turned decisively toward U.S. small-cap equities, with forecasts showing faster earnings and revenue growth than large caps even as interest rates are expected to rise. This shift comes as the U.S. economy remains resilient, supported by domestic demand, a manufacturing recovery, and accelerating AI-related capital expenditure.

Historically, periods when small-cap earnings growth leads in a solid U.S. expansion have often coincided with multi-year relative outperformance versus large caps, as seen in cycles during the late 1970s, early 1990s, and early 2000s. In those environments, broad benchmarks such as the Russell 2000 typically gained ground against large-cap indices like the S&P 500 (SPX).

Current smart-money positioning reflects the view that smaller, domestically focused companies are leveraged to this backdrop, particularly in manufacturing-linked and AI capex supply chains. ETFs tied to small-cap benchmarks, including iShares Russell 2000 ETF (IWM), Vanguard Small-Cap ETF (VB), SPDR S&P 600 Small Cap ETF (SLY), and more targeted vehicles such as Invesco S&P SmallCap Industrials ETF (PSCI), sit at the center of this thesis, with price action increasingly tracking relative earnings momentum and domestic growth indicators.