Macro & Market Views

The Small Idea: Onward, Small Cap Soldiers!

The Small Idea: Onward, Small Cap Soldiers!

During the seemingly eternal trial of small cap underperformance, we took comfort in George Harrison’s reassurance that “All Things Must Pass.”

With the Russell 2000 Index at a 52-week high—having logged a return exceeding 65% since “Liberation Day”—small caps are now just one year into what we hope will be an extended redemption tour.1 As we near the end of first-quarter reporting season, spirits remain high thanks to a large number of what we consider stellar earnings reports from smaller companies. After underperforming for what seemed forever, small caps have finally demonstrated what a boost can come from a spurt of strong earnings.

Pundits, finally, have largely dropped the “small caps are dead forever and should be avoided at all costs” mantra after some Magnificent-Seven names proved fallible after all, while some small companies astounded with quality businesses and solid balance sheets. Recent “big winners” lists have been graced with more than a sprinkling of small cap names in biotech, energy and data centers—sometimes with daily gains that might previously have been considered laudable full-year returns.2

At this juncture, we small cap investors may be tempted to plant a victory flag and bask in anticipation of endless celebratory parades ahead. On the other hand, the song says all things must pass. So we are forever looking forward, fortifying our portfolio for whatever siege may lie ahead.

While it would have been easy for small cap managers to lose heart during the brutal four-year-plus stretch when large caps seemingly outperformed every day, we stuck to what we view as a tried-and-true process. That is, acquiring good companies at what we perceive to be attractive prices, then patiently waiting for the rest of the market to recognize the underappreciated value in our holdings. And that is what we are doing, still.

Whatever comes next, we diehard small cap managers will always have a long road ahead. Volatility remains a feature of our asset class, and what we perceive as unrealized value is often dismissed by the marketplace in the short run. So, the joy I feel during periods of strong small cap performance is often tinged with melancholy. After slogging through the fallow periods, we’ve finally seen our work pay off and reinforce confidence in our process. After taking a breath, though, it’s time to wonder what comes next.

Successful stock selection and good results bring high expectations. Stocks are up, but are they up enough? Is the virtuous cycle just beginning, or has it reached an apex? My former partner in Boston was fond of taunting me with the reminder that “Fear is temporary, but greed gnaws forever.” With hope that the dark days of discouraging small cap performance are behind us, we are following a number of bright beacons still on the horizon.

Earnings upswing. For the first time in several years, earnings for the Russell 2000 are projected to outstrip those of the S&P 500 Index for at least the next two years.3

Software-enabled efficiencies. Outsourced software and servicing solutions may provide resources for small companies to scale their operations, improve efficiency and facilitate the conversion of some costs from fixed to variable, easing the need for working capital.

AI-driven growth. Artificial intelligence (AI) may enable some small cap companies—including suppliers to infrastructure and data center construction—to expand their customer bases without incremental spending on research and development, underpinning both top-line growth and margin expansion. Healthcare and consumer goods companies could conceivably see even greater benefits from AI through enhanced development of premium products that drive pricing power.

 

We are following bright beacons still on the horizon as we pursue underappreciated value.

Policy and economic tailwinds. A more benign regulatory environment may spur mergers and acquisitions activity, while reindustrialization and reshoring trends could be of benefit to smaller domestic-focused businesses.

A resurgent IPO market. With free money a thing of the past, private equity sponsors may be incentivized to monetize their investments through initial public offerings (IPOs). Increased liquidity and investor focus on private-to-public marks could more broadly enhance valuations and performance for publicly traded small cap companies overall.

In the final analysis, cycles will be with us always. Sometimes, there is no place to hide, but history has shown that fundamentals eventually prevail. In good and bad times alike, we do what we have always done: rely on our disciplined research process to assemble a portfolio of what we consider underappreciated value.

1. Source: FactSet; data as of May 6, 2026.
2. Source: Reuters; data as of April 22, 2026.
3. Source: FactSet; data as of May 15, 2026.

The information contained in this material is provided by First Eagle Investment Management, LLC (“FEIM”) and its global subsidiaries (collectively, “First Eagle”). FEIM is an investment adviser registered with the US Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training.

This material is for informational purposes only and reflects prevailing conditions and the judgment of the author(s) as of the date of publication, all of which are subject to change. This material should not be relied upon as investment advice; it does not constitute a recommendation to buy or sell a security or other investment; and it is not intended to predict or depict the performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or consider the specific objectives or circumstances of any investor. We consider the information in this material to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment.

Prospective investors should inform themselves and consult with an investment, tax or legal professional as to any applicable legal requirements, taxation and exchange control regulations in the countries of their citizenship, residence or domicile that may be relevant prior to investing.

This material does not constitute an offer or solicitation in any jurisdiction where or to any person to whom it would be unauthorized or unlawful to do so.

All investments involve the risk of loss of principal.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

The value and liquidity of portfolio holdings may fluctuate in response to events specific to the companies or markets, as well as to economic, political or social events in the US or abroad. During periods of market volatility, the value of individual securities and other investments at times may decline significantly and rapidly. The securities of small and micro-size companies can be more volatile in price than those of larger companies and may be more difficult or expensive to trade.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis.

Magnificent Seven is widely used in the financial media and elsewhere to refer to seven very large US technology-related stocks—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

Russell 2000® Index (Gross/Total) measures the performance of the small cap segment of the US equity universe. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. A total-return index tracks price changes and reinvestment of distribution income.

S&P 500 Index (Gross/Total) measures the performance of 500 of the top companies in the leading industries of the US economy and is widely recognized as a proxy for the US market as a whole. A total-return index tracks price changes and reinvestment of distribution income.

Indexes are unmanaged and do not incur management fees or other operating expenses. One cannot invest directly in an index.

The information presented does not reflect the performance of any fund, strategy or account managed or serviced by First Eagle, and there is no guarantee that investors will experience the type of performance reflected. There is no guarantee that any market forecast set forth in this material will be realized. There is no guarantee that any historical trend referenced herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The mention of specific securities is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice.

Availability of the products or services described may be restricted by law in certain jurisdictions. This material may not be distributed, published or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

United Kingdom: Napier Park Global Capital Ltd.is authorized and regulated by the Financial Conduct Authority (FRN: 541427).

Middle East: This material is for information purposes only and has not been, and will not be, registered with or reviewed or approved by any regulator located in the Middle East. It does not constitute or form part of any marketing initiative, any offer to issue or sell, or any solicitation of any offer to subscribe to or purchase, any products, strategies or other services, nor shall it, or the fact of its distribution, form the basis of, or be relied on in connection with, any contract resulting therefrom. In the event that the recipient of this material wishes to receive further information regarding any products, strategies or other services, it shall specifically request the same in writing from an authorized financial adviser.

Canada: Pursuant to the international adviser registration exemption in National Instrument 31-103, First Eagle Investment Management, LLC. is informing you that: (i) First Eagle Investment Management, LLC. is not registered in Canada and is advising you in reliance upon an exemption from the adviser registration under National Instrument 31-103; (ii) First Eagle Investment Management, LLC’s jurisdiction of residence is New York, USA; (iii) there may be difficulty enforcing legal rights against First Eagle Investment Management, LLC. because it is a resident outside of Canada and all or substantially all of its assets may be situated outside of Canada.

FEF Distributors, LLC (“FEFD”) (SIPC), a limited purpose broker-dealer, distributes certain First Eagle products. FEFD does not provide services to any investor but rather provides services to its First Eagle affiliates. As such, when FEFD presents a fund, strategy or other product to a prospective investor, FEFD and its representatives do not determine whether an investment in the fund, strategy or other product is in the best interests of, or is otherwise beneficial or suitable for, the investor. No statement by FEFD should be construed as a recommendation. Investors should exercise their own judgment and/or consult with a financial professional to determine whether it is advisable for the investor to invest in any First Eagle fund, strategy or product.

First Eagle Investments is the brand name for First Eagle Investment Management, LLC and its subsidiary investment advisers. First Eagle Alternative Credit and Napier Park are brand names for the two subsidiary investment advisers engaged in the alternative credit business.

©2026 First Eagle Investment Management, LLC. All rights reserved.