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2 minutes to read by  R.Drage, CPA, CFA®, A.Topps, CPA, CFA Jan 9, 2026

Key points:

U.S. Small Cap stocks may be in position to benefit from:

  • Rate cuts: Immediate reduction in interest expenses for small companies reliant on floating-rate loans.

  • Policy tailwinds: Tariffs, fiscal spending, tax cuts, and deregulation may boost domestic manufacturing and demand.

  • Historical precedent: Small caps historically lead during economic recoveries and outperform post-junk rallies.

Introduction

Looking solely at index-level returns, U.S. small cap stocks have delivered a relatively positive year. The Russell 2000 Index returned +13.5% through November, a strong return that aligns with historical annualized trends. However, beneath the surface, active management has struggled due to a concurrent ‘junk rally’ that has penalized high-quality companies. Junk rallies lead to significant underperformance of quality characteristics, such as low debt levels, high return on equity, and consistency in earnings year over year - qualities that active managers tend to seek in companies they own. This environment, marked by speculative trading and policy uncertainty, has led to unusual index concentration and underperformance of quality-focused strategies.

Despite the recent experience, we believe current market conditions are set up to deliver strong future total returns in small cap equities and, in our view, are particularly attractive for active portfolio managers.

  • Macro backdrop favorable for small cap – rate cuts have immediate impact on interest expense for small companies; tariff-related inflation from imports has been lagged but kicking in in coming months

  • Attractive valuations: small caps are at a historically wide discount to large cap; profitable companies with quality traits are trading at a discount compared to the broader index

  • Inefficiencies persist: active management historically adds value in small cap given lower analyst coverage; active managers tend to rebound and outperform after periods of strong underperformance
Disclosure
This material is provided by RBC Global Asset Management (RBC GAM) for informational purposes only and may not be reproduced, distributed or published without the written consent of RBC GAM or its affiliated entities listed herein. This material does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. This material is not available for distribution to investors in jurisdictions where such distribution would be prohibited.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc. (RBC GAM Inc.), RBC Global Asset Management (U.S.) Inc. (RBC GAM-US), RBC Global Asset Management (UK) Limited (RBC GAM-UK), and RBC Global Asset Management (Asia) Limited (RBC GAM-Asia), which are separate, but affiliated subsidiaries of RBC.

In Canada, this material is provided by RBC GAM Inc. (including PH&N Institutional), each of which is regulated by each provincial and territorial securities commission with which it is registered. In the United States, this material is provided by RBC GAM-US, a federally registered investment adviser. In Europe this material is provided by RBC GAM-UK, which is authorised and regulated by the UK Financial Conduct Authority. In Asia, this material is provided by RBC GAM-Asia, which is registered with the Securities and Futures Commission (SFC) in Hong Kong.

Additional information about RBC GAM may be found at www.rbcgam.com.

This material has not been reviewed by, and is not registered with any securities or other regulatory authority, and may, where appropriate and permissible, be distributed by the above-listed entities in their respective jurisdictions.

Any investment and economic outlook information contained in this material has been compiled by RBC GAM from various sources. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by RBC GAM, its affiliates or any other person as to its accuracy, completeness or correctness. RBC GAM and its affiliates assume no responsibility for any errors or omissions in such information.

Opinions contained herein reflect the judgment and thought leadership of RBC GAM and are subject to change at any time. Such opinions are for informational purposes only and are not intended to be investment or financial advice and should not be relied or acted upon for providing such advice. RBC GAM does not undertake any obligation or responsibility to update such opinions.

RBC GAM reserves the right at any time and without notice to change, amend or cease publication of this information.

Past performance is not indicative of future results. With all investments there is a risk of loss of all or a portion of the amount invested. Where return estimates are shown, these are provided for illustrative purposes only and should not be construed as a prediction of returns; actual returns may be higher or lower than those shown and may vary substantially, especially over shorter time periods. It is not possible to invest directly in an index.

Some of the statements contained in this material may be considered forward-looking statements which provide current expectations or forecasts of future results or events. Forward-looking statements are not guarantees of future performance or events and involve risks and uncertainties. Do not place undue reliance on these statements because actual results or events may differ materially from those described in such forward-looking statements as a result of various factors. Before making any investment decisions, we encourage you to consider all relevant factors carefully.

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© RBC Global Asset Management Inc., 2026
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