SMidCaps Poised for Potential Outperformance in 2026

Small- and mid-cap U.S. stocks have faced persistent underperformance against large caps since 2018. According to Yardeni Research, this trend continued through 2024 and 2025 even after recession fears eased. The S&P Midcap 400 and S&P 600 indexes have trailed the S&P 500 nearly every year, save for a rebound triggered by the Federal Reserve’s emergency easing from 2020 to 2021. Yardeni suggests that 2026 could be the year when SMidCaps finally deliver outperformance, especially if investors target specific sectors.

Sector Focus and Fundamentals Drive Opportunity

Yardeni Research cautions that a broad SMidCap rally is unlikely; instead, strength may emerge in select industries. It highlights Financials, Industrials, and Health Care sectors—segments also favored within the large-cap universe—as areas with stronger fundamentals. These industries show improving metrics, suggesting selective exposure within SMidCaps may yield superior results compared to a general benchmark.

Central to the prolonged underperformance has been earnings stagnation. While forward earnings estimates for the S&P 400 and S&P 600 have largely plateaued since late 2022, the S&P 500’s earnings projections have surged to record highs. Yardeni attributes this divergence partly to large-cap firms acquiring promising SMidCap companies before their earnings growth fully materializes. However, recent weeks have seen signs of pickup in SMidCap forward earnings, potentially signaling a coming turnaround.

Revenue growth patterns reveal additional disparities. The S&P 500 and S&P 400 have experienced steady advances in forward revenue per share since 2022. In contrast, the S&P 600 has lagged behind. Furthermore, profitability measured by forward profit margins remains below its 2022 peaks for SMidCaps, whereas the S&P 500 enjoys record-high margins. Valuations also differ significantly; forward price-to-earnings ratios for SMidCaps have been well below those of large caps since 2021, reversing the pre-pandemic trend when smaller companies typically traded at a premium. Yardeni notes this reflects disappointing earnings growth but also presents an attractive valuation gap.

Analyst Scenarios: Earnings Recovery and Growth Projections

Analysts covering the S&P Midcap 400 anticipate earnings growth of 14.3% for 2026 and 20% for 2027, with forward earnings reaching record levels. For the S&P 600, expectations are mixed, forecasting 15.5% growth in 2026 but slowing sharply to 3.3% in 2027. These projections highlight some uncertainty but leave open the possibility of SMidCap outperformance, especially if the segments identified by Yardeni deliver as expected.

Outperformance: Market Outlook for SMidCaps

Despite a multi-year performance deficit, SMidCaps trade at valuation discounts relative to large caps, bolstered by improving earnings forecasts. Investors looking for potential outperformance in 2026 may find the best opportunities in the Financials, Industrials, and Health Care sectors within the SMidCap space. Although broader market conditions will influence performance, the combination of cheaper valuations and anticipated earnings growth supports the case for a reversal in fortunes.

As the year progresses, market participants will closely monitor earnings trajectories and macroeconomic developments. The recent uptick in forward earnings and steady revenue trends within targeted SMidCap sectors suggest 2026 could unlock sustained gains for this traditionally undervalued asset class.