Francis Gannon of Royce Investment Partners said small-cap stocks will remain in a "sweet spot" for a significant period.
This outlook suggests a shift in market momentum toward smaller companies, which often lag behind large-cap stocks during periods of economic volatility or high interest rates. A sustained rally in this sector could signal broader health in the U.S. economy and a diversification of investor gains.
Speaking on CNBC's "Power Lunch" program on Monday, Gannon, the co-Chief Investment Officer of Royce Investments, said the current environment is favorable for smaller equities. He attributed this positive positioning to a turnaround in small-cap earnings and beneficial seasonality [1], [2].
Gannon highlighted the recent trajectory of the Russell 2000 index as a primary indicator of this trend. He said the index rose nearly 13 percent in 2025 [2]. According to Gannon, the firm expects that specific performance to continue throughout 2026 [2].
Small-cap stocks typically represent companies with smaller market capitalizations that may offer higher growth potential but carry more risk than established blue-chip firms. Gannon's assessment suggests that the risks associated with these assets are currently outweighed by the potential for upside gains, a dynamic he believes will persist for quite some time [1].
The Russell 2000 is widely regarded as the benchmark for small-cap performance in the U.S. market. The 13 percent gain [2] observed last year provides the foundation for the current optimism shared by Royce Investment Partners as they navigate the 2026 fiscal landscape.
“Small-cap stocks will be in a sweet spot for quite some time.”
The projection of a 'sweet spot' for small-cap stocks indicates a bullish sentiment toward the domestic U.S. economy. Because small-cap companies are more deeply tied to local markets than multinational corporations, their growth often reflects a recovery in domestic spending and corporate earnings. If the Russell 2000 continues its 2025 trajectory, it may signal a rotation of capital away from the tech-heavy giants that have dominated recent years.
