What Trends Are Guiding Global Small-Caps in 2026?

Global small-cap equities are gearing up for stronger potential growth in 2026, supported by trends in artificial intelligence (AI) infrastructure, European defense spending and pro-growth policies in Japan.

Based on consensus expectations, global small-caps are expected to outpace their larger-cap peers in earnings growth, as shown in Figure 1.

Small-caps have tended to succeed on the strength of their expertise, business models and other stock-specific drivers. However, larger economic and regulatory forces can also affect their performance.

Our team sees several factors that could create the conditions for more robust growth. These include the prospect of a more favorable interest rate environment, tax breaks for U.S. consumers and a lighter regulatory regime for businesses.

Top Trends Supporting Global Small-Cap Growth in 2026

AI Growth Is Driving Global Energy Demand

Major tech firms like Alphabet, Meta and Microsoft intend to spend heavily on AI-related infrastructure again in 2026.¹ We think companies in the energy, utilities and industrials sectors could stand to benefit from these initiatives.

That’s because AI requires significantly more power than traditional computing. In fact, the International Energy Agency estimates that the world’s data centers could double their electricity consumption by 2030.²

Increased manufacturing activity tied to reshoring may also support higher energy demand.

We view this trend as a significant driver for small-cap firms that design power plants, upgrade electrical grids and manufacture critical machinery. Small-caps typically possess specialized experience that makes them essential for this kind of work.

CECO Environmental, a provider of air purification and HVAC systems, exemplifies a company that is facing increased demand for data centers and power generation.

While we see continued opportunity, we are closely monitoring the sustainability of CapEx spending tied to AI.

Strong Air Travel Demand and Improving Aerospace Supply Chains

In recent years, aerospace companies have experienced delays and disruptions in their supply chains involving engines and other critical components. That situation has eased considerably, allowing production to accelerate.

At the same time, aerospace companies are working through a sizable backlog of orders, and global air traffic is still substantial.

Many airlines also need to replace aging fleets, further boosting demand for major aerospace companies and the smaller firms that supply them.

We believe small-cap companies like Hexcel, a market leader in advanced composite materials, are well-positioned to benefit from improving trends. Hexcel supplies advanced composites that are 5 times stronger and 30% lighter than aluminum, directly supporting airlines’ sustainability and fuel-efficiency goals.³

Europe Prepares to Ramp Up Defense, Infrastructure Spending

Last year, European leaders outlined plans to increase spending on defense and infrastructure as the region confronts a more aggressive Russia.

• The EU’s Readiness 2030 plan calls for an additional €800 billion in defense-related spending, including a €150 billion fund that member states can tap.⁴

• NATO members have also agreed to boost their defense spending from 2% of their GDP to 3.5% by 2035.⁵ Each country would also dedicate another 1.5% to related needs, such as infrastructure, cyber defense and civil preparedness.

Over the coming months, this funding is expected to start flowing to companies involved in this effort, potentially supporting small-cap firms that supply larger contractors. The EU aims to begin work on its highest-priority projects during the first half of 2026.⁶

Japan’s Growth Outlook Continues to Improve

Sanae Takaichi, Japan’s recently elected prime minister, has made economic growth her top priority. Takaichi’s government rolled out an economic stimulus package worth about $135 billion, with measures designed to help households cope with higher costs.⁷

The prime minister has also signaled government support for key fields, including AI and semiconductors, cybersecurity and shipbuilding.⁸

These moves build on earlier policies, such as Japan’s corporate governance reforms and a national digitalization effort. Potential small-cap beneficiaries include technology consulting firms and Japanese companies with plans to increase dividend payouts, unwind cross-shareholdings and buy back shares.

An example is 77 Bank, a regional Japanese bank, which is delivering improved revenues, profits and returns on equity. The management team is cutting costs and exploring ways to boost its valuation, including share buybacks and increased dividend payouts.

Tariffs, Policy Support Encourage More Reshoring

We continue to see companies plan to begin or expand manufacturing of semiconductors, pharmaceuticals, autos and other goods in the U.S.

The Semiconductor Industry Association, for example, has identified hundreds of billions in planned private-sector investment in U.S.-based chip production.⁹

Higher U.S. tariffs are encouraging many reshoring efforts, but other factors — including a desire to strengthen supply chains and more supportive government policies — also play a role.

The One Big Beautiful Bill, for example, includes measures that incentivize U.S.-based production, such as full expensing for new equipment.¹⁰ The CHIPS Act offers support for the domestic production of semiconductors.¹¹

This could all serve as a tailwind for companies supporting reshoring efforts through plant construction, energy solutions, automation and other sectors. Small-caps typically gain more directly from an increase in industrial manufacturing.

The trend faces obstacles, including higher tariff-related costs for machinery and other resources that must still be imported. Overall, however, we view this as creating significant opportunities for small-cap firms involved in reshoring.

M&A and IPO Trends Shaping Small-Caps in 2026

Forecasters predict that mergers and acquisitions will rise in 2026, alongside an uptick in initial public offerings (IPOs).

The EY-Parthenon Deal Barometer expects a 3% increase in overall M&A deal volume in 2026.¹² The value of these deals has been climbing, too. Through the first nine months of 2025, deal value was 36% higher compared to a year earlier.

When Deloitte surveyed dealmakers about 2026, the vast majority said they anticipated more and bigger deals.¹³ However, fewer respondents expected to see a “significant” increase in deal volume.

Meanwhile, global IPOs picked up during the third quarter of 2025, particularly in India, China and the U.S.¹⁴ Favorable conditions, such as lower interest rates and continued strength in AI, could support more offerings in 2026.

We believe small-caps could stand to benefit from a rise in dealmaking if it results in a re-rating in stock prices and higher valuations.

Global Small-Cap 2026 Outlook: A Focus on Fundamentals

We see an improving environment for small-cap investing in 2026. Valuations are attractive, earnings growth is expected to accelerate, and interest rate headwinds may turn into tailwinds.

With valuations now sitting below long-term averages as seen in Figure 2, the case for revisiting the asset class looks increasingly compelling.

There is no shortage of small-cap companies benefiting from strong secular and cyclical trends. However, it’s still essential to evaluate each firm individually, based on a thorough analysis of its fundamental characteristics.

As global markets evolve, we believe our team’s disciplined approach helps us identify attractive opportunities in small-cap companies across various sectors and regions.

We remain focused on identifying firms with accelerating, sustainable growth while taking advantage of the persistent inefficiencies and volatility in small-cap markets.