T. Rowe Price Midyear Outlook Backs Small-Cap Stocks

T. Rowe Price’s 2026 Midyear Market Outlook finds that large capital expenditures for artificial intelligence are altering the economics of the biggest technology platforms. The report says spending is moving into power equipment, data-center infrastructure, electrical components and cooling systems rather than concentrating only at a handful of software and cloud platforms.

The firm notes that these investments are putting pressure on free cash flow and changing return profiles at mega-cap tech companies. The report highlights that capital spending will separate companies that can convert investment into durable earnings from those whose spending dilutes returns.

Markets experienced a difficult first half of 2026, including the Iran war, higher energy costs, persistent inflation and supply-chain disruptions. Despite those headwinds, U.S. earnings growth helped risk assets hold up through May.

Small-cap and value stocks outperformed through May 29 as earnings growth began to spread beyond the mega-cap leaders. The report points to greater upside potential in smaller companies that supply equipment or provide specialized services to data centers and other parts of the AI supply chain.

The outlook highlights two T. Rowe Price exchange-traded funds as ways for investors to gain exposure. The T. Rowe Price Small-Mid Cap ETF (TMSL), launched in June 2023, focuses on companies with improving earnings, strong free cash flow and attractive valuations; the report lists about $2.43 billion in assets and a 20.1% year-to-date return. The T. Rowe Price Active Core U.S. Equity ETF (TACU), launched in December 2025, holds roughly 550 to 650 large-cap names using quantitative models and fundamental research; the report lists about $14.2 million in assets and a 10.2% year-to-date return.

The firm frames the change as a re-ranking of market leadership rather than a short-term rotation and recommends active stock selection and diversified exposure across market-cap segments as investors reassess where growth and returns will come from in an environment of heavy industrial capital investment tied to AI.