The Stage Looks Set for a Small-Cap Surge—Here are the Stocks on My Radar
- - The Stage Looks Set for a Small-Cap Surge—Here are the Stocks on My Radar
Joey FrenetteDecember 5, 2025 at 9:52 AM
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Bank of America seems to expect small-cap stocks to outperform in 2026, citing Federal Reserve rate cuts and increased M&A activity.
The iShares Core S&P Small-Cap ETF is down 2% over the past year.
Casey’s General Stores and PJT Parnters stand out as great picks.
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If you're like many investors, you probably don't have enough small- or mid-cap stocks in your portfolio. Undoubtedly, after strong gains from the cap-weighted S&P 500, it's not like you need the smaller names to help power you to impressive gains.
That said, with extended valuations in big tech (and the broader S&P 500 in general), many investors may be wondering if it's time to pursue opportunities that might be able to score more growth without having to pay a premium price tag.
Of course, we all have our reasons for shying away from the small-cap universe. Perhaps it's because we're unfamiliar with the small names that are outside of the S&P 500, or maybe it's because of the extra volatility that they tend to exhibit.
Maybe it's because many of the names are much harder to value, given their earnings profiles can fluctuate wildly, making them tougher to value. And while not all small-cap stocks are unprofitable, many of them are, making them seem much riskier than the blue chips we've known to love over the years.
Finally, perhaps the biggest case against going big on the small caps is their relative underperformance over the years. It really doesn't matter which small-cap index you look at; odds are, it's trailed the S&P 500 by a wide margin, especially in recent years, as the Mag Seven giants took off, contributing to much of the S&P's incredible recent performance.
Bank of America sounds upbeat on the small caps for 2026
There is reason to change one's tune on the small caps or the mid caps going into 2026, though. With Bank of America recently highlighting the possibility that small-cap stocks could outperform in the new year as the Federal Reserve moves ahead with more interest rate cuts, I do think now's a good time to ponder the value that smaller-cap stocks could add to your portfolio as we head into uncharted waters.
It's not just lower rates, which tend to be a robust tailwind for the smaller companies, that small- and mid-cap investors can look forward to in the year ahead. Bank of America also sees the potential for more M&A. And, of course, the valuations look better relatively speaking, especially given indices such as the iShares Core S&P Small-Cap ETF (NYSEARCA:IJR) haven't done anything in the past year (down 2%). Could it be that the small-cap tailwinds have yet to hit?
Possibly. Either way, I think Bank of America is spot-on to be more bullish on the small-cap cohort in the new year. In this piece, we'll go over two smaller names I've stumbled upon that I think are worthy of investors' watchlists.
Casey's General Stores
Casey's General Stores (NASDAQ:CASY) isn't technically a small-cap stock (actually, it's a larger mid-cap, if you can even call it that anymore), but it wasn't too long ago when it was. The $20.9 billion convenience store chain has been a big source of gains, more than doubling in the past two years, thanks in part to food-driven same-store sales growth. Undoubtedly, Casey's may seem like just another convenience store to stop at while you're fuelling up your vehicle somewhere in rural America.
However, with great-tasting pizza, the firm seems to be more of a restaurant-convenience store hybrid than anything else. Either way, the company is growing profitably, and with plenty of room for expansion (and, yes, perhaps Casey's is a suitable takeover target), the seemingly hefty 36.1 times trailing price-to-earnings (P/E) multiple might be worth paying for if it means getting exposure to such a durable growth gem.
The consumer is being more selective with how they spend these days. And clearly, Casey's seems to know what they want. As such, the large mid-cap (or small large-cap) seems worth picking up.
PJT Partners
PJT Partners (NYSE:PJT) is a compelling and lesser-known small-cap financial with a $6.7 billion market cap and an opportunity to capitalize on a potential M&A boom in the new year. The boutique investment bank's specialty is in M&A advisory and similar services.
As a big name in the space with a very high growth ceiling, PJT Partners seems to be one of the timelier plays going into the new year.
The shares are quite cheap too, given the potential year-ahead tailwinds, with a modest 20.7 times forward P/E multiple. With shares recently correcting off their highs, I think it might be time to start doing some buying if you seek deeper value in corners of the market that many may have overlooked.
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