Smaller Stocks Step Into the Spotlight

Small- and mid-cap stocks—often grouped as SMID stocks—are having a strong year. Through June, the small-cap Russell 2000 index was up more than 22%, mid-caps gained a little over 15%, and the large-cap S&P 500 advanced just over 10%.

That leadership makes sense when you look at what is driving the market.

First, the traditional economy has been more resilient than expected. Consumers are still spending, inflation pressures have eased, and global manufacturing appears to be recovering. That combination has created a healthier backdrop for small- and mid-sized companies whose earnings are closely tied to everyday economic activity.

Second, the AI boom is no longer just a story about the biggest technology stocks. For the past few years, most of the attention—and much of the reward—went to large semiconductor and hardware leaders. But as companies pour hundreds of billions of dollars into chips, data centers, power infrastructure, and related equipment, the benefits are moving further down the supply chain. Many SMID companies provide the products, services, and infrastructure that help make that buildout possible.

So, can this continue? AMG believes the answer is yes, but with caution. The traditional economy should remain the main source of SMID earnings growth into 2027. If consumers continue to regain purchasing power and manufacturing keeps improving, many SMID companies should have room to grow.

The bigger question is whether AI capital spending can keep expanding at the same pace. Much of that spending has come from five major platform companies: Amazon, Alphabet, Microsoft, Meta, and Oracle. Together, they spent more than $350 billion on AI-related capital expenditures in the first half of 2026. Earnings were still growing, but free cash flow was pushed toward zero as spending accelerated. That disconnect helps explain why some of the largest AI platform companies have recently lagged and why investors should not assume today’s pace of spending will continue indefinitely.

If AI spending slows, some semiconductor and technology hardware companies could feel it, including smaller companies that benefited from the buildout. That is why AMG still favors SMID stocks, but not indiscriminately. This is an environment where selectivity matters. Active investors may want to look for companies supported by durable economic growth while avoiding businesses that depend too heavily on extraordinary AI spending. SMID stocks may still have room to run, but the best opportunities are likely to come from careful security selection—not broad exposure alone.