Are Small Caps Catching Up in 2026?
The first half of 2026 has marked a massive comeback for smaller companies. Fueled by shifting market dynamics and a rotation away from stretched large-cap valuations, U.S. small-cap stocks have significantly outperformed the broader market
While the MSCI World delivered 8,92 % over the last six months, our favorite Small-Cap ETF surged by 25,17 % and over the last 12 months even 39,75 % (while the MSCI world over the past 12 months only delivered 19,85 %).
Year-to-Date (YTD) & 12-Month Performance Comparison (in EUR)
| 6-Month Return (YTD 2026) | |
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U.S. Small-Cap ETF (Pensionfriend Way) | | |
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The following graphic shows visually how US small caps outperformed the S&P 500 over the past few months:
What is the Cause of the Small-Cap Catch-Up?
For several years, the AI and technology boom created a highly concentrated market, boosting a select few mega-cap companies to historic valuations. However, the tides are turning for two distinct reasons:
Stretched Valuations: Investors are increasingly realizing that large-cap tech stocks are heavily priced in, leaving limited room for exponential growth.
The Practical AI Boom: Small-cap companies are highly innovative and agile. As AI and automation tools become democratized, these smaller firms are adopting them rapidly to boost productivity, unlock massive efficiency gains, and drive immense upside potential.
Despite this recent rally, the valuation gap has only partially closed. On paper, roughly 20% of the historical valuation gap between small and large caps still remains - meaning there is still significant runway left for smaller companies.
How the Pensionfriend Strategy Beats the MSCI World
At Pensionfriend, we explicitly build independence and financial security into our clients' portfolios by maintaining a 50% weight in small-cap ETFs for most allocations.
When small caps were lagging in 2024 and early 2025, our automated, disciplined system did exactly what it was designed to do: it bought more shares while they were cheap.
The Power of Regular Investing (Dollar-Cost Averaging)
Consider a client who invested 100 € each month starting in January 2025.
In early 2025, the Pensionfriend global portfolio briefly lagged behind the MSCI World.
Because the portfolio maintained a fixed 50 % small-cap allocation, the client naturally accumulated a large number of undervalued shares.
Following the 2026 small-cap rebound, that same client is now 5,45 % ahead of the MSCI World in total returns.
We don't try to time the market. By buying heavily when small caps were undervalued, our clients are now being rewarded as the market corrects itself.
Curious how a monthly savings plan could work for you? Book a call with our team and we'll walk you through the numbers.
