Freedom Broker: S&P SmallCap 600 set to double growth of S&P 500 in 2H26
Freedom Broker thinks small-cap outperformance is starting to pick up pace / Photo: Facebook / NYSE
The S&P SmallCap 600 is expected to outperform the S&P 500 through the end of 2026, with respective second-half gains of 10.8% versus 5.3%, according to a fresh strategy outlook by Freedom Broker. Its analysts expect small caps to benefit from resilient U.S. domestic demand, easing inflation, expectations for looser Fed policy, and stronger corporate earnings.
Details
Freedom Broker expects (the strategy outlook was seen by Oninvest) the S&P SmallCap 600 to reach 2,000 points by the end of the year, implying 10.8% upside from its Tuesday close of 1,804.34. Meanwhile, the S&P 500 is seen ending the year at 7,900 points, which translates into 5.3% upside. Over the next 12 months, the outperformance is expected to widen further. Freedom forecasts the S&P SmallCap 600 will climb 19.2% to 2,150 points, and the S&P 500 8.7% to 8,150 points.
Rationale
Freedom argues that several factors should allow small caps to deliver returns roughly double those of large-cap stocks. Chief among them is a recovery in domestic demand.
"Unlike large caps, whose performance has been driven largely by the AI [investment] cycle and the high concentration of earnings among a handful of technology leaders, small-cap companies remain more sensitive to the state of domestic demand," Freedom Broker analysts write.
The small-cap segment should also benefit as a disinflationary trend resumes following the recent pullback in oil prices. Current interest rate expectations reflect a cautious approach by the Fed, as well as inertia in market positioning, more than a lasting deterioration in macroeconomic conditions, according to Freedom.
In its base case, which the firm assigns a 70% probability, the impact of higher oil prices gradually fades, short-term inflation expectations stabilize in the 2.1-2.3% range, and the Fed leaves interest rates unchanged throughout 2026 before looking to resume easing in 2027. Because smaller companies are typically more sensitive to funding costs and credit conditions, such an environment would mean a tailwind.
Freedom forecasts earnings per share for S&P SmallCap 600 companies will increase 13.9-22.5% in 2026, depending on the market backdrop. It does not expect the index to fall back into an earnings recession in any of its main scenarios and believes valuation multiples will remain at levels that do not point to a materially overbought market.
