SKN | BNY Mellon Sees Further Upside for U.S. Small Caps as Earnings Recovery Gains Momentum

Key Points

• BNY Mellon believes U.S. small-cap equities remain well positioned for additional gains, supported by improving corporate earnings and a resilient domestic economy.
• After recovering from negative earnings growth in 2023 and 2024, small-cap companies are projected to deliver approximately 20% earnings growth in 2026.
• While higher interest rates and geopolitical risks remain challenges, BNY Mellon views improving fundamentals as supportive of long-term small-cap performance.

BNY Mellon has expressed continued optimism toward U.S. small-cap equities, arguing that improving corporate fundamentals and a broadening market rally create favorable conditions for the asset class despite ongoing macroeconomic uncertainty.

The firm’s outlook comes as small-cap stocks have outperformed many expectations this year, even while investors continue navigating elevated interest rates, geopolitical tensions, and inflation concerns.

According to BNY Mellon, stronger earnings growth and the domestic orientation of many smaller companies continue to provide attractive long-term investment opportunities.

Earnings Recovery Strengthens Investment Case

One of the primary drivers behind BNY Mellon’s constructive outlook is the sharp improvement in corporate earnings.

Following periods of declining profits in 2023 and 2024, small-cap companies returned to positive earnings growth in 2025, with expectations for further acceleration during 2026.

The projected improvement reflects stronger business activity, improved operating performance, and healthier profit margins across many sectors of the U.S. economy.

Sustained earnings expansion could support higher equity valuations while strengthening investor confidence in the small-cap segment.

Domestic Focus Offers Economic Advantage

Unlike many large multinational corporations, small-cap companies typically generate a greater proportion of their revenue within the United States.

This domestic concentration allows them to benefit more directly from resilient consumer spending, business investment, and ongoing economic expansion.

As long as the U.S. economy continues demonstrating relative strength, BNY Mellon believes smaller companies may remain well positioned to capitalize on improving economic conditions.

The firm’s outlook also reflects expectations that broader market leadership could continue expanding beyond large-cap technology companies.

Interest Rates Remain an Important Risk

Despite its positive outlook, BNY Mellon acknowledges that small-cap stocks remain particularly sensitive to changes in monetary policy.

Persistent inflation, higher energy prices, or escalating geopolitical tensions could lead central banks to maintain elevated interest rates for longer than expected or tighten policy further.

Higher borrowing costs can disproportionately affect smaller companies, which often rely more heavily on external financing than larger corporations.

Investors therefore continue monitoring inflation data, Federal Reserve policy decisions, and broader macroeconomic developments as important drivers of future market performance.

Diversification Supports Long-Term Allocation

BNY Mellon believes small-cap equities can provide valuable diversification within a balanced global investment portfolio.

As market leadership broadens beyond a concentrated group of mega-cap technology companies, smaller businesses may benefit from improving investor sentiment and expanding capital flows into previously overlooked sectors.

The firm views selective exposure to quality small-cap companies as an effective way to participate in potential long-term economic growth while complementing investments across other equity market segments.

Closing Insights

BNY Mellon’s positive outlook for U.S. small-cap equities reflects improving earnings momentum, resilient domestic economic conditions, and the potential for broader equity market participation beyond large-cap technology leaders. While higher interest rates and geopolitical uncertainty continue to present risks, strengthening corporate fundamentals and accelerating profit growth provide meaningful support for the asset class. Investors will continue monitoring economic conditions, monetary policy, and earnings performance as they assess opportunities within the evolving U.S. equity market.

For a confidential discussion regarding equity portfolio strategy, small-cap investing, asset allocation, institutional investment management, or broader capital markets opportunities, contact our senior advisory team.