Having exposure to small caps within the context of a broader investment allocation approach is a good idea. As for why small caps should be garnering some additional attention in the current market environment, let's start with the current operating backdrop.

Small cap companies are often more representative of the overall economy domestic economic activity. And while earnings performance of large cap companies has rightfully received a substantial amount of attention recently, there are some clear signs that earnings performance for the overall economy and for small caps specifically is improving.

After experiencing declines in 2023 and 2024, revenue and earnings growth in small caps, both turned positive last year and accelerated through 2025 and into 2026.

In fact, if we exclude the comparison issues during the pandemic, the first quarter of 2026 was actually the best earnings environment for small caps since 2018.

Another sign of broadening operating momentum, for example, is the recent improvements in the manufacturer's purchasing managing index, or the PMI, which has moved above 50 for the past four months. And that's indicative of a broadly improving domestic industrial economy and comes after nearly four years of contraction.

So right now we have an operating environment that's improving and that's coupled with small cap equities trading at a wider than typical discount to large cap on several key valuation metrics that we evaluate.

Based on recent data, small cap valuations relative to large caps are trading at a 15 to 20% discount to a 30-year average of a mix of metrics such as P/E ratio, free cash fill yield, and enterprise value to EBITDA.

In prior periods when we've had small cap performance, operating performance improving, and valuations attractive, this has generally led to favorable returns for the group.