Second Quarter 2026 Update: The Case for Small Cap Value Equities
- RISE Investments
- Jul 9
- 4 min read
Updated: 2 days ago
Equity performance continued to be led by cyclical sectors, such as domestic small cap equities.
Short-term interest rates rose on expectations of future Federal Reserve rate hikes.
Small cap value equities represent a core weighting in RISE client equity allocations.
Second Quarter Update
Equities rose in the second quarter led by cyclical asset classes, such as U.S. small cap equities. Progress towards a resolution of the Iran conflict, strong earnings growth, and economic momentum offset concerns of tighter monetary policy through the quarter. The new Federal Reserve Chair, Kevin Warsh, is inheriting an economy that is growing above trend and an inflationary backdrop that is above their long-term target of 2.0%.
The fixed income market has reflected the economic backdrop with Two-Year Treasury yields ascending to 4.1% compared to a Federal Funds target range of 3.50% to 3.75%. The Two-Year Treasury yield is a reasonable indicator of future Federal Reserve policy, signaling tighter monetary policy ahead despite political pressure for looser policy. This set up allows for higher levels of current income for fixed income clients and re-balancing opportunities for those who are overweight equity exposure.
The Case for Small Cap Value Equities
Recent headlines have been centered around multi-trillion-dollar market capitalization growth companies, including a stampede of initial public offerings (SpaceX, OpenAI, and Anthropic, among others). Despite this excitement, a lesser owned corner of the equity market has been quietly outperforming.
What are Small Cap Value Equities?
Small cap value equities have small market capitalizations and cheap valuations. Within an equity style box, they reside in the bottom left corner.
They generally comprise of cyclical old-economy industries, especially when compared to large cap growth equities which dominate many investor’s equity portfolios today.
Why Have Small Cap Value Equities Outperformed Over the Long-Term?
Since 1926, small cap value equities are the best performing equity asset class despite higher volatility.
Small cap value equities have a unique return profile, which increases diversification benefits of owning them. For instance, small cap value equities provided healthy returns leading up to, and following, the 2000 tech bubble burst.
The rationale for long-term outperformance of small cap value equities has been well documented by academic studies. The two most common reasons include:
Size Premium: Small market capitalization companies outperform large market capitalization companies as investors are compensated for greater risks, such as higher volatility and lower liquidity.
Value Premium: Value equities outperform growth equities, as they are perceived as riskier, which compensates investors with higher return.
Why are Small Cap Value Equities Attractive Today?
The favorable economic backdrop supports owning cyclical assets, such as small cap value equities. Additionally, from today’s valuations, the historic forward 5-year annualized return for small cap value equities is approximately 13%.
Looking Forward and Parting Thoughts
The first half of 2026 exemplified the value of diversification. Exposure across company sizes, geographies, and asset classes drove materially different, and in many cases better, outcomes than concentration in a single area of the market. As we enter the second half of the year, we are focused on the macroeconomic backdrop, geopolitical developments, and navigating a higher-for-longer rate environment.
Real GDP is tracking toward approximately 2.2% growth for the full year, which is healthy but not immune to risk. Oil prices and the trajectory of the Iran conflict remain a wildcard for inflation and consumer spending, yet a sustained de-escalation could be a meaningful tailwind in the second half of the year. With the likelihood of tighter monetary policy ahead, we are maintaining a shorter duration position in fixed income, favoring the income available in short-to-intermediate U.S. Treasuries while preserving flexibility as the inflation picture evolves.
Near-term market headlines, Fed press conferences, and a geopolitical flare-ups can feel urgent in the moment but rarely change the fundamentals of a well-constructed financial plan. Our job is to ensure your portfolio reflects your goals, time horizon, and tolerance for risk. Not the day-to-day noise in any given quarter.
As always, we welcome the opportunity to discuss this letter or answer any questions you may have. Please do not hesitate to reach out to us at any time.
Sincerely,
The RISE Team
Footnotes
[1] Small Cap Value is the S&P 600 Value Index. Large Cap Growth is the Russell 1000 Growth Index. Performance data as of 6/30/2026.
[2] Monthly data is from 7/1/1926-5/31/2026 per Dimensional Fund Advisors. Small Cap Value is the Fama/French U.S. Small Value Research Index. Large Cap Growth is the Fama/French U.S. Large Growth Research Index.
[3] Small Cap Value is the Russell 2000 Value Index. Large Cap Growth is the Russell 1000 Growth Index. Returns are annualized.
Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information. Please note, this article is for education purposes and should not be treated as tax or legal advice. This article is not a substitute for legal or tax advice from your professional legal or tax advisor.