Investing in U.S. small-cap companies
Small- and Mid-Cap Stocks Shine Amidst S&P 500 Giants
Small- and mid-cap stocks have been making a comeback, outperforming the top stocks of the S&P 500 in recent months. This trend was evident in August 2025, when the Russell 2000 small-cap index posted a 1.6% gain over two consecutive days, outpacing the S&P 500 by its largest margin since late 2024 [1].
The Russell 2000, known as the world's "biggest small index," consists of small- and mid-cap stocks that offer a more domestic focus compared to the top stocks of the S&P 500. These companies have been showing resilience, even amidst a challenging first half of the year [2].
One such company is Macom Technology Solutions (Nasdaq: MTSI), a firm with diversified exposure to industrial, telecommunications, and data-center markets. Macom's strong competitive position is bolstered by its more than 600 patents, which enable it to design and manufacture semiconductor technologies for various networks [6].
Another promising investment option is MSA Safety (NYSE: MSA), the global leader in the development, manufacturing, and supply of safety products. Unlike many industrial companies, MSA tends to experience less cyclicality due to the mission-critical and non-discretionary nature of safety products [5].
Valuation Discount and Growth Prospects
Key factors supporting the long-term growth potential for small- and mid-caps versus top S&P 500 stocks include a valuation discount. Small-cap value stocks in the Russell 2000 trade at more than 2 standard deviations below their long-term relative valuation to large caps, suggesting they are deeply undervalued compared to large-cap growth stocks [3].
Mid-caps also show solid earnings growth prospects and attractive pricing. Certain areas such as AI-related tech remain growth engines even among larger stocks [4]. The inclusion of firms in the Russell 2000 enhances institutional interest and capital inflows, supporting growth and liquidity for small/mid caps [1].
Challenges Remain
Despite the promising outlook, challenges remain. Short-term uncertainty in trade policy, economic growth, and interest rate trajectories could cause volatility. Recent quarterly performance saw mid-2025 small caps underperforming the Russell 2000 benchmark and large caps, indicating stock selection and sector allocation risks [5].
Demographics and Growth Drivers
Encompass Health (NYSE: EHC), the largest operator of patient rehabilitation facilities in the US, benefits from demographic trends as the US population ages. The rehabilitation services offered by Encompass Health are needs-based and non-cyclical, contributing to steady revenue growth, attractive profit margins, and strong cash flows [5].
In conclusion, the Russell 2000 and mid-cap stocks offer a valuation-driven, historically supported opportunity for long-term growth relative to top S&P 500 stocks, which currently trade at premium valuations with concentration risks. This potential is bolstered by improving earnings prospects for mid-caps and cyclical rebound patterns in small caps, amid a macro environment favoring value and diversified exposure [1][3][4][5].
Sources: [1] CNBC [2] Yahoo Finance [3] Morningstar [4] Fidelity Investments [5] The Wall Street Journal [6] Macom Technology Solutions website [6] MSA Safety website
Investing in the Russell 2000, a group of small- and mid-cap stocks, presents a valuation-driven opportunity for long-term growth, as these stocks trade at a discount compared to top S&P 500 stocks. Technology companies like Macom Technology Solutions, with diverse exposure to industrial, telecommunications, and data-center markets, offer promising prospects due to their patented semiconductor technologies. On the other hand, MSA Safety, a global leader in safety products, demonstrates less cyclicality and potential for growth, making it another worthwhile consideration for a technology-focused savings portfolio in finance.
