T. Rowe Price’s Love Says Small-Cap Earnings Are Turning

Small-cap and mid-cap stocks are outrunning large caps in 2026, and one portfolio manager says the shift has room to run.

Key Takeaways:

• Earnings estimates for small caps are rising after 10 quarters of declines.
• Small and mid-cap stocks trade 20% to 35% below large caps.
• TMSL has returned 26.62% over the past year.

Jodi Love, lead portfolio manager of the T. Rowe Price Small-Mid Cap ETF (TMSL), said on Bloomberg’s “ETF IQ” that narrow mega-cap and AI leadership has driven recent years. But she said 2026 looks different. The small-cap benchmark is up about 20% year to date, compared with a gain of just below 10% for large-cap indexes.

That rotation follows 10 straight quarters of declining earnings estimates for small- and mid-cap companies. The trend turned in the first quarter of this year, Love said, and consensus estimates now point to accelerating earnings growth through the rest of 2026 and into 2027.

Those gains are starting from a discount. Small and mid-cap stocks trade at 20% to 35% below large-cap indexes, Love said, leaving more room to grow from a lower valuation base.

See more: Small-Caps Offer Rare Value as Sector Gaps Narrow

Small-Cap Stock Picks Target AI’s Suppliers

Rather than chasing megacap technology stocks in the AI trade, Love said her fund favors the “picks and shovels” companies that benefit from big tech’s capital spending. Her top overweights are industrials, financials and health care, including aerospace and defense, regional banks and biotech.

Eric Balchunas, senior ETF analyst at Bloomberg, compared small caps to college basketball, where top prospects often skip straight to the pros instead of staying in the minors.

Love pushed back on the idea that the small-cap market lacks the presence of strong companies. She pointed to holdings that graduated out of the Russell 2500 index, including SanDisk Corp. (SNDK), Ciena Corp. (CIEN) and Fabrinet (FN). She said the fund identified those names early and sold them through the ETF’s redemption process to lock in gains.

Some names exit through acquisitions instead. Love pointed to a biotech holding that Vertex Pharmaceuticals Inc. (VRTX) bought out a few weeks earlier. That holding, Crinetics Pharmaceuticals Inc. (CRNX), agreed on July 6 to a $10 billion buyout from Vertex.

A rebound in small-cap IPO activity is also feeding the pipeline, Love said. New listings, many in industrials, have arrived almost every week this year after what she called a “pretty slow lull” about a year ago.

How TMSL Captures the Small-Cap Shift

That shift has shown up in TMSL’s own numbers. The fund has returned 17.8% year-to-date and 26.6% over the past year, according to ETF Database. Investors have added about $1.2 billion in new money this year, pushing total assets to about $2.7 billion. TMSL launched in June 2003 and recently crossed the three-year anniversary milestone.

Love called TMSL a truly active ETF. She said it stays aware of the Russell 2500 benchmark but doesn’t hug it, with an active share close to 80%. That approach lets the fund sell winners as they graduate into large caps and redirect the money into new ideas.

Small caps have underperformed large caps for almost two decades, Love said. Once that trend inflects, as it has this year, she said the reversal historically tends to last for several years. She cited earnings growth, valuation discounts and a growing number of SMID companies tied to U.S. domestic policy.

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