Small-Cap Stocks Outpace Large-Caps on Earnings Recovery, AI Investor Letter Says

Small-cap stocks have broken out to outperform mega-cap benchmarks like the S&P 500 and Nasdaq 100 so far in 2026, propelled by a fundamental recovery in earnings, according to the September investor letter from Investing.com's ProPicks AI service. The analysis suggests this trend represents a structural shift in market leadership after five years of large-cap dominance.

A Fundamental Shift

The letter contrasts the profit drivers of different market segments, noting the S&P 500 has become heavily weighted towards technology and communications stocks tied to the artificial intelligence build-out. In contrast, the Russell 2000 small-cap index has greater exposure to industrials, financials, and consumer cyclical sectors that more closely reflect the broader U.S. economy.

According to the analysis, this divergence is creating a significant valuation gap. While consensus estimates project small-cap earnings to grow several times faster than the S&P 500's over the next year, the group trades at a more attractive valuation of 16 to 18 times forward earnings, compared to roughly 22 times for large-caps.

AI Strategy Rebalances Portfolio

The ProPicks AI's "Small-Cap Sprinters" strategy, which the letter states has returned +69.3% over the past year, adjusted its holdings in September to capitalize on this market breadth. The model rotated out of two positions that had reached their fair value targets and added two new ones.

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• Exited: Dorian LPG (LPG) was sold after a +25.9% gain since its selection.
• Exited: Haemonetics Corp. (HAE) was sold following a remarkable +86.9% gain over its holding period.
• Added: Kohl’s Corp. (KSS), a consumer discretionary retailer.
• Added: Puma Biotechnology (PBYI), a healthcare company.

Rationale for New Selections

The letter provided a fundamental basis for its new additions. Kohl's was selected after its quarterly earnings per share (EPS) beat consensus estimates by 124%. The analysis highlighted its valuation of just 7.6 times earnings and the resumption of its share buyback program.

Puma Biotechnology was added after it crushed quarterly EPS expectations by over 400%. The firm's debt-free balance sheet and what the model perceives as a significant undervaluation relative to its growth trajectory were cited as key factors in its selection.