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Market Decode™: Small Caps, Big Potential

This often-underappreciated asset class is having a moment in today’s markets. Watch the video for reasons to consider adding it to your portfolio.

AFTER A DISAPPOINTING START TO 2025, small cap stocks (generally defined as companies in the $250 million to $2 billion size range) have been outperforming large caps lately, and if history is any guide, that trend could continue. Since 1990, small-caps have outperformed large-caps on average in the one, three, six, 12, and 24 months after the Federal Reserve (the Fed) has cut interest rates.¹ Other factors that could contribute to their change in fortune are today’s increase in mergers and acquisitions activity and more accommodating regulatory policies.

What could that mean for your portfolio?

In the video above, Marci McGregor looks at the risks and potential opportunities small caps represent today and the role they could play in your portfolio. “Given their current low valuation, we see small caps as an asset class well worth exploring for both potential growth and diversification,” says Marci McGregor, head of Portfolio Strategy for the Chief Investment Office, Merrill and Bank of America Private Bank.

For continuing insights on the markets, tune in regularly to the CIO's Market Update audiocast series.

¹Source: Bloomberg. Data includes each Fed interest rate cut since 1990, as of September 16, 2025. Large-cap = S&P 500 Index. Small-cap = Russell 2000 Index

Important disclosures

The opinions expressed are as of 10/08/2025 and are subject to change.

Investing involves risk, including the possible loss of principal.

Past performance is no guarantee of future results.

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.

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Investing involves risk. There is always the potential of losing money when you invest in securities. Past performance does not guarantee future results. Asset allocation, rebalancing and diversification do not guarantee against risk in broadly declining markets.

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