Wall Street has delivered a mixed performance so far in 2026 (as of Feb. 6, 2026), with small-caps clearly outperforming large-cap stocks. While the S&P 500 has gained 1.1% and the Dow Jones has risen 3.6%, the Nasdaq Composite has slipped 0.9%. In contrast, the small-cap Russell 2000 has surged 6.5%.
Volatile Macro Environment
Several major developments have impacted markets this year, including heightened geopolitical tensions, fluctuations in the U.S. dollar, disruptions due to a winter storm and President Donald Trump’s nomination of former Fed governor Kevin Warsh as the next Federal Reserve chair.
Geopolitical Risks Favor Domestic-Focused Stocks
Geopolitical uncertainty intensified in early 2026 following U.S. actions involving Venezuela, renewed tensions with Iran, and policy disputes with European allies. Such developments often benefit small-cap stocks, which tend to generate most of their revenues domestically and are less exposed to global trade tensions.
Stronger Dollar Supports Small Caps
The U.S. dollar strengthened following the Warsh nomination, as markets view him as a relatively hawkish banker. A stronger dollar can weigh on large-cap companies with extensive foreign exposure but tends to support smaller companies with limited foreign ties and reduced currency translation risks.
Improving Earnings Outlook
Small-cap earnings are showing signs of recovery after recent declines. The S&P SmallCap 600 index is projected to return to positive growth in 2025, with double-digit earnings expansion expected over the next two years, per Zacks Earnings Trends issued on Feb. 4, 2026. Improving fundamentals are bringing investor confidence back to the once-struggling segment.
Sector ETFs & Stocks to Play
Against this backdrop, below we highlight a few small-cap sector-based exchange-traded funds (ETFs) and stocks that appear to be in great shape.
Finance
The finance sector of the small-cap index S&P 600 is expected to record 26.7% earnings growth in Q4 2025 and 33.9% in Q1 2026. The earnings growth should come on respective revenue growth of 9.6% in Q4 2025 and 8.2% in Q1 2026.
Invesco S&P SmallCap Financials ETF PSCF – Up 4% this year (as of Feb. 6, 2026)
The underlying S&P SmallCap 600 Capped Financials and Real Estate Index is designed to measure the overall performance of common stocks of US financial services companies. The fund charges 29 bps in fees.
Peoples Bancorp Inc PEBO – Up 13.4% this year (as of Feb. 6, 2026)
This bank holding company has good momentum and value score of B.
Aerospace
The aerospace sector of the S&P SmallCap 600 index is expected to log earnings growth of 48.7% in Q4 2025 and 40.1% in Q1 2026. This growth is projected to be supported by revenue increases of 17% in Q4 2025 and 12.3% in Q1 2026.
U.S. Global Technology and Aerospace & Defense ETF WAR – Up 4.8%
The ETF provides access to the global defense sector, including companies in Aerospace & Defense, Semiconductors, Cybersecurity, Data Centers, and Homeland Security from around the world.
Astronics ATRO – Up 35.3%
The manufacturer of specialized lighting and electronics for the cockpit, cabin, and exteriors of military, commercial transport, and private business jet aircraft has a Zacks Rank #2 (Buy). It is a growth stock.
Industrial Products
The industrials sector of the S&P SmallCap 600 index is expected to record earnings growth of 9.5% in Q4 2025 and 9% in Q1 2026. Revenue growth is projected at 5.7% in Q4 2025 and 3.6% in Q1 2026.
Invesco S&P SmallCap Industrials ETF PSCI – Up 15.3%
The underlying S&P SmallCap 600 Capped Industrials Index measures the overall performance of the securities of U.S. industrial companies.
Proto Labs PRLB – Up 30.8%
It is an online and technology-enabled quick-turn manufacturer of custom parts for prototyping and short-run production.It produces CNC machined and injection molded plastic parts. The stock has a decent value-growth-momentum score of C.
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Astronics Corporation (ATRO): Free Stock Analysis Report Proto Labs, Inc. (PRLB): Free Stock Analysis Report Peoples Bancorp Inc. (PEBO): Free Stock Analysis Report Invesco S&P SmallCap Industrials ETF (PSCI): ETF Research Reports Invesco S&P SmallCap Financials ETF (PSCF): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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