T. Rowe Price: Small-cap earnings estimates have turned higher

Jodi Love, lead portfolio manager of T. Rowe Price’s Small‑Mid Cap ETF (TMSL), said small‑cap earnings estimates have turned higher after 10 consecutive quarters of declines and are forecast to accelerate through 2026 and into 2027.

The shift has begun to affect market returns. The small‑cap benchmark was roughly 20% higher year to date, compared with gains just under 10% for large‑cap indexes. Consensus analyst forecasts began to inflect in the first quarter of 2026 and now point to rising earnings for small‑ and mid‑cap companies in the coming quarters.

Valuation spreads provide context. Small‑ and mid‑cap stocks trade about 20% to 35% below large‑cap indexes, leaving a lower starting point for potential gains if earnings momentum continues.

TMSL is managed actively and has an active share near 80%, allowing the fund to maintain a portfolio that diverges from the Russell 2500 benchmark while using it as a reference. The fund returned about 17.8% year to date and roughly 26.6% over the past 12 months. Net inflows this year totaled about $1.2 billion, bringing assets under management to near $2.7 billion. TMSL launched in June 2003.

Portfolio positioning reflects expectations for where earnings and capital spending will drive returns. Rather than overweighting large technology companies tied to the AI trade, the fund favors suppliers and service providers that benefit from big tech capital expenditures. Overweights include industrials, financials and health care, specifically aerospace and defense suppliers, regional banks and biotechnology companies.

Deal and listing activity is also changing the small‑cap landscape. Initial public offerings, particularly in industrials, have increased after a slowdown about a year ago, adding new companies to the investible universe. The fund has sold holdings that grew beyond the small‑ and mid‑cap range and redirected proceeds into new ideas, realizing gains as names moved into larger‑cap indexes.

Examples of companies identified early by the fund and later redeemed after growth include SanDisk, Ciena and Fabrinet. Some exits occurred through acquisitions; Crinetics Pharmaceuticals agreed to a $10 billion buyout by Vertex Pharmaceuticals on July 6.

Love noted that small caps underperformed large caps for nearly two decades and that historical reversals have in some cases continued for several years, supported by earnings improvement and valuation convergence.