Walk into most portfolios and you’ll see a familiar pattern. Large-cap names dominate. Apple, Microsoft, and the big global players sit front and center. But tucked away, often overlooked, is a corner of the market that has been beaten down so hard it’s starting to look interesting again: global small-cap equities.
For wealth builders, whether you’re in your 30s or your 60s, this space has always played a unique role. Not as the core of a portfolio, but as a small slice — usually 5–10% — that can give you valuable rebalancing opportunities when markets shift.
Today, global small caps are in distress. But history says that’s exactly where opportunity often begins.
Why Small Caps Have Struggled
Small companies around the world have been under pressure for more than a decade. From about 2011 through 2023, large caps dominated. The mega-cap tech rally only widened that gap.
Higher interest rates hit small businesses harder because they tend to carry more floating-rate debt. A stronger U.S. dollar also hurt, especially since American small caps are more domestically focused and less able to tap international revenues. And while inflation is now cooling, the last two years saw margins squeezed for smaller firms.
The result? One of the longest stretches of underperformance we’ve ever seen. Fourteen years of small caps lagging large caps — far longer than the typical 11-year cycle.
For many investors, that’s been enough to push small caps off the radar. Which is exactly why they deserve another look.
The Opportunity in Distress
When an asset class has been left behind, valuations usually tell the story. Global small caps are trading at some of the steepest discounts in decades.
- Price-to-book ratio: ~1.6 vs ~3.0 for broad global equities.
- Forward P/E: ~16.6x, below long-term averages and on par with large caps for the first time in 20 years.
- Dividend yield: ~2.2%, a touch higher than large caps.
That discount matters. If markets start to re-rate small caps even partway back toward historical norms, investors could see meaningful gains simply from multiples expanding. And that’s before earnings growth enters the picture.
History adds weight here. After major troughs, small caps have a habit of rebounding hard. On average, the Russell 2000 has posted one-year rebounds of about +60% following deep drawdowns.
What Could Drive a Turnaround
Several forces could line up in favor of global small caps over the next few years:
- Earnings acceleration
Small-cap earnings are projected to grow faster than large caps in 2025–2026. After two years of contraction, analysts expect U.S. small-cap earnings to surge around 25% in 2025, compared with ~10–12% for the S&P 500. - International tailwinds
Outside the U.S., central banks in Europe and Asia are closer to easing, with fiscal stimulus already showing up in places like Germany and China. That gives international small caps, which carry less debt, a relative advantage. - Sector diversification
Unlike large-cap indices dominated by tech, global small caps have more industrials, financials, and materials. These cyclical areas tend to benefit when growth broadens out beyond the handful of mega-cap names. - Currency shifts
A softer U.S. dollar boosts non-U.S. small caps. In the first half of 2025, international small caps returned +17.7% — beating both U.S. large and small caps — thanks in part to currency moves.
Risks That Remain
None of this means small caps are a sure bet. They carry higher volatility, and downturns hit them harder. Risks to watch include:
- A deeper global slowdown that hits cyclical sectors.
- Inflation staying stubborn, forcing rates higher for longer.
- Investor sentiment staying locked on large-cap growth, leaving small caps overlooked.
For these reasons, most investors should think about small caps as a satellite allocation, not a core holding.
Portfolio Role: 5–10% for Rebalancing Opportunities
This is where small caps can shine for wealth builders. A 5–10% allocation to global small caps isn’t about chasing outsized gains or swinging for the fences. It’s about creating rebalancing opportunities.
When markets move, that slice of small caps will often move more — up or down. That volatility creates natural points to trim when they rally or add when they fall. Over time, that discipline can enhance returns without betting the farm.
For example:
- If small caps rebound sharply after a downturn, you can trim profits and redeploy into steadier assets.
- If they fall further while valuations improve, adding a little more can set you up for the next rebound.
This is the essence of disciplined wealth building.
Global View, Local Anchor
Even though this story is global, the lesson applies here in the Okanagan too. Most local investors already hold large-cap exposure through index funds and retirement accounts. Very few have meaningful exposure to the thousands of small-cap companies outside that core.
Adding that 5–10% sleeve can open the door to parts of the market that don’t move in lockstep with the S&P 500. It’s a way to keep your portfolio diversified beyond the same big names everyone else owns.
Scenarios to Keep in Mind
The research lays out three broad paths for small caps:
- Base Case (~50% probability): Slow global growth, rates plateauing, modest earnings recovery. Average positive equity returns.
- Bull Case (~20% probability): Stronger growth, central banks cutting, valuations re-rating higher. A strong rebound with accelerated returns
- Bear Case (~30% probability): Recession or sticky inflation, earnings falling, valuations compressing. Returns flat to negative.
Only the bull case delivers the strong rebound many investors hope for. But even the base case supports small caps as a useful diversifier with potential for better-than-average returns relative to large caps.
Why This Matters Now
Markets move in cycles. We’ve been through one of the longest periods of small-cap underperformance on record. Valuations are at multi-decade discounts. Earnings are projected to rebound. Central banks are closer to easing than tightening.
No one knows the exact timing, but history says these are the conditions that often precede strong recoveries in small caps.
For wealth builders, the point isn’t to predict the exact moment. It’s to recognize that the cycle is turning, and to be positioned with that 5–10% sleeve so you have the flexibility to rebalance when the opportunity shows up.
Next Step: See What This Looks Like in Your Portfolio
I’m not a salesman. I win on knowledge and service.
If you want to see how a global small-cap allocation could fit into your own retirement plan or investment mix, the best place to start is with an Investment Snapshot. It’s a one-hour check-up that shows you where you stand, where the risks are, and where opportunities like this might help.
You can book your Investment Snapshot today at franzvickerson.ca/investmentplanning.
Final Word
Global small caps are distressed. That’s exactly why they deserve a fresh look.
A 5–10% allocation can give you rebalancing power. It can open exposure to areas of the market most investors ignore. And it can set you up to take advantage of one of the few corners of equities that still look attractively priced today.
Cycles turn. When they do, it pays to be ready.
