Resilient Economy Bolsters Small Caps

Layering the same macro worries—from tariffs to interest rates to potential recession to freeform uncertainty—on top of one another can only go so far. As we’ve seen since the “Liberation Day” selloff, the bad news loses its sting at some point and investors stop re-discounting the same hypotheticals. 

The economy thus far has been more resilient to tariff pressures than was generally anticipated. Decent economic growth and manageable inflation in the US remain well supported, in our view, by low energy prices, strong employment and an undersupply in housing. Smaller companies are broadly expected to benefit from these trends. The consensus estimate Russell 2000 Index earnings growth in 2025, for example, currently stands at 41%, down only slightly from expectations for 50% growth on January 1 despite the many challenges that have emerged throughout the year.¹  

Given this relatively benign backdrop, it’s not hard to imagine the emergence of additional small cap tailwinds. Take, for example, the market for initial public offerings (IPOs). Though volume in April was disrupted by the tariff drama, the 97 initial public offerings (IPOs) launched in the first half puts 2025 on track to easily surpass the 150 offerings in 2024 and the 109 in 2023².  While these deals were not in our target capitalization range, momentum can be contagious. 

Mergers and acquisitions (M&A) can be similar. Though M&A remains depressed, it’s been our experience that it creates a self-reinforcing dynamic as activity builds, as neither buyers nor sellers want to be left at the table without a partner. All else being equal, a Federal Reserve rate cut would likely bolster both IPO and M&A activity, as well as the small cap market in general.