Small caps to beat large next year as economy broadens out, M&A picks up, Jefferies says
Jefferies believes that small-cap stocks will usurp their larger counterparts in 2026 to lead the market higher. In a Tuesday note to clients, Jefferies strategist Steven DeSanctis set his 2026 year-end target for the Russell 2000 small-cap index to 2,825. DeSanctis is known as a top small-caps analyst on Wall Street. The Russell 2000 has gained 13% this year, lagging behind the broader S & P 500 , up 16% in the same time. DeSanctis’ new forecast is about 12% above where the benchmark closed on Tuesday. .RUT YTD mountain RUT YTD chart “Small wins, get down market cap with sentiment picking up,” the strategist wrote. As a catalyst for the theme, DeSanctis pointed to a current gross domestic product, or GDP, of over 2%. He expects this to accelerate next year, which could boost earnings to jump more than 14%. “With earnings growth set to improve, a driver for our themes will be a broader equity market, with more stocks beating their indexes than average,” he added. “The smallest of the small is very cheap; Performs better when market broadens out.” Meanwhile, lower interest rates alongside a steeper yield curve should also increase small-cap stocks’ performance, DeSanctis said. A pickup in mergers and acquisitions activity should also be helpful to the cohort. The strategist noted that the last 11 months have been the second highest on record for M & A activity, following 2016. M & A and deal activity have especially picked up for companies with a market capitalization below $1 billion, making up more than 60% of active deal activity, he added. “Given how unloved small caps have become, we think finding a partner makes sense, cash levels stand at $2.4T, and HY market is wide open,” DeSanctis wrote. “Companies want to buy growth, scale matters, and getting bigger makes sense these days.” One common way to gain exposure to small-cap names is through the iShares Russell 2000 ETF (IWM) , which is up 14% this year. Outside of DeSanctis, many other analysts across Wall Street started the year out similarly calling for an outperformance in small-cap stocks. However, a combination of tariffs, inflation and narrow GDP growth kept the tech-heavy S & P 500 in the lead over the Russell 2000.
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