Markets Brief: Where Top Managers Are Finding Opportunity in a Concentrated Small-Cap Market

Stocks head into the final weeks of the second quarter having staged an impressive bounce from their late-March low. While the market wobbled last week on the Federal Reserve’s apparent swing toward more willingness to raise interest rates, the Morningstar US Market Index is up 10.5% so far this year, having risen nearly 19% from its 2026 bottom and down just over 1% from its most recent record high, set at the beginning of this month.

Investors will likely continue keeping one eye on negotiations between the United States and Iran and resulting moves in oil prices. Meanwhile, the coming week is light on scheduled economic and corporate news, with only the Fed’s preferred inflation measure, the Personal Consumption Expenditures Index, due Thursday.

In this week’s Markets Brief, we’ll highlight one of the panels from last week’s Morningstar Investment Conference, where analyst David Carey sat down with three distinguished small- and mid-cap managers to check in on what’s been driving performance in small-company stocks and some of their favorite names. Check out our other conference coverage here.

Small Caps Holding Their Own

While the focus has been on mega-cap stocks, including newly minted ones, after a long period of being left in the dust, small caps have been faring much better recently. Over the past year, the Morningstar US Small Cap Index is up 26.7%—its best 12-month period since 2023. So far in 2026, small caps are up more than 11%.

While that’s behind the gains on mid-cap stocks, small caps are ahead of large caps, which have gained less than 9% this year. To be sure, large-cap stocks fared better than small names in the second quarter, but it’s notable that small caps are putting up a good fight in 2026.

Small Caps Are Concentrated, Too

Just like their big-cap brethren, small-cap stocks have seen narrowly concentrated gains, noted Miles Lewis, a portfolio manager and principal at Royce Investment Partners. “The market this year, in particular, has been extraordinarily narrow in small caps, which is unusual,” he said. The top 20 stocks in the Russell 2000 (just 1%) have generated 40% of the index’s returns so far this year. “The top 200 stocks have driven almost 90% of the returns, so that means 1,800 stocks out there are doing very little,” he said.

Lewis admitted this has been a headwind for Royce: “Those are probably the stocks that you know we tend to gravitate toward.” Still, he points to a high-level macro trend as potentially providing a tailwind for small-company stocks. “We’re bottom up, so take this with a grain of salt, but I think the era of globalization is slowing, or coming to an end, and we’re going in the opposite direction, at least in the United States, certainly for the next couple of years,” he said. “That’s actually a good thing for small caps. 80% of the Russell 2000 revenues are generated here in the US, and that’s only 60% for the Russell 1000, so it’s disproportionately positive for us.”

In addition, Lewis argues there is a bigger opportunity set: “You do the math on the largest companies in this country, and what you’d have to believe to earn an exceptional return from here. With small caps, you have thousands of names that aren’t there yet. They can grow 20%, 30%, 40% with incredible incremental returns and do that for five or 10 or 15 years. I just think the opportunity set is much more compelling on average over time.”

Small-Cap Picks

The panelists each highlighted certain stocks. Wasatch Global Investors portfolio manager Mike Valentine pointed to RBC Bearings RBC, which produces highly engineered bearings for industrial, defense, and aerospace uses. “It’s an incredible business that’s now approaching $20 billion in market cap,” he said. “RBC is dominant within a niche. They sell multimillion dollars of bearings into every single Navy submarine produced in the US.”

Valentine continued: “The reason we like businesses like that is that, as you can imagine, getting bearings right is mission-critical for a Navy sub, but they are a small enough portion of the bill of materials that no one’s going to push them on price. These are incredibly important businesses to the American ecosystem and infrastructure, and they have competitive advantages—moats that can’t be penetrated easily by anyone at scale.”

Scott Brayman, who co-founded Champlain Investment Partners in 2004, owns shares in the CAT-scan analysis company Heartflow, which uses artificial intelligence to generate a map of what’s going on in the body. “We joke around about tattooing the company’s product on our chest, because if we’re lying in the hospital and they’re opening us all up, we want the doctor to make sure they go get this technology,” he says. Champlain also owns Procept BioRobotics, which provides treatments for benign prostate hyperplasia. “The outcomes here are just way better than the other treatments,” he says of its technology.

Miles Lewis, principal at Royce Investment Partners, pointed to Ingevity NGVT, a small-cap chemical manufacturer. “Ingevity’s crown jewel is its performance material segment. They take hardwood or wood chips and convert them into activated carbon,” he explains. “Typically, these kinds of companies have high single-digit margins—low double-digit if they’re really lucky. Ingevity has 50% operating margins, and that’s phenomenal. Their technology can’t be replicated.”