After years of anticipation, the long-awaited rotation into US small and mid-caps (SMID) is finally gaining traction. Charlotte Daughtrey, Investment Director - Equities, explains why the second half of 2025 presents a rare convergence of macroeconomic, policy and market forces - creating a compelling opportunity for investors.
Valuations are attractive, but this time there’s more
At the 14-year mark, the current outperformance cycle by US large-cap stocks over small cap is well past the historical 10-year average. US small and mid-cap (SMID) companies have been out of favour since the pandemic due to the high-interest rate environment, growing geopolitical tensions, recessionary concerns and the dominance of AI-related names, all of which have created an attractive valuation distortion. US SMID companies should trade at a premium due to their higher growth potential, but they are currently trading at a 30% discount to their large-cap peers and at a discount to their own history.
These companies are significantly under researched relative to large caps, with five or fewer analysts covering 43% of the Russell 2500 Index – a benchmark for US small-cap stocks. This information inefficiency creates an exciting opportunity for active managers to generate alpha by exploiting valuation dislocations through bottom-up research.
While valuation alone rarely triggers a rotation, the current macro, market and policy backdrop suggests that this time, it could be different.
You can now read the full whitepaper at the link below
