Small caps are poised to finish 2025 with a fifth consecutive year of trailing large caps, yet Bank of America says conditions are aligning for a long-awaited reversal in 2026.

According to Bank of America, the long-neglected small-cap stocks are set up to be the market’s surprise winners in 2026, supported by Fed cuts, M&A momentum, and a U.S. capex revival as key catalysts.

Bank of America Predicts Small-Cap Stocks Will Beat S&P 500 in 2026

In a note shared Tuesday, Bank of America strategist Jill Carey Hall declared a bullish stance on the Russell 2000, as tracked by the iShares Russell 2000 ETF (NYSE:IWM), saying she expects small caps to “outperform mid and large caps” as economic conditions and market flows turn in their favor.

"We are bullish on small caps in 2026, expecting small caps to outperform mid and large caps," Hall says.

The call rests on five key reasons that could unleash a multi-year rally for the Russell 2000 index.

1) Earnings Momentum Is Shifting

Earnings momentum is poised to be a key driver of small-cap outperformance in 2026, with consensus forecasts pointing to stronger and accelerating profit growth for smaller companies.

Analysts expect S&P SmallCap 600 earnings to rise 19% in 2026, well above the 13% gain forecast for the S&P 500 and 15% for the S&P MidCap ...