Can US small caps survive the software selloff?

Statue of Liberty, Skyscrapers of the Lower Manhattan Financial District — (Image credit: OlegAlbinsky via Getty Images)

US stocks have struggled in the opening months of 2026. New analysis from Goldman Sachs suggests that they have made their worst start to a year compared to global counterparts since 1995.

In the year to 18 February, the MSCI ACWI ex USA Index, which tracks large- and mid-cap stocks across developed and emerging markets excluding the US, gained 9.1%. During the same period, the S&P 500, which is effectively a proxy for large US stocks, gained just 0.5%.

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Some of the US’s leading software stocks have been caught in the storm. Salesforce (NYSE:CRM) fell 29.1% in the year to 18 February, ServiceNow (NYSE:NOW) fell 29.6% and Adobe (NASDAQ:ADBE) fell 24.8%, amid fears that AI disruptors like OpenAI or Anthropic will erase their business models.

“Even highly profitable firms with strong balance sheets and deep proprietary datasets [are coming] under pressure,” said John Wyn-Evans, head of market analysis at wealth and asset management group Rathbones. “That shift captures just how quickly investor sentiment has reversed from last year’s broad AI‑driven optimism to a wave of pessimism that treats the entire sector as vulnerable, regardless of fundamentals.”

Could US small caps be poised to gain?

The US big tech selloff doesn’t mean the entire US market should be overlooked. Large caps have soared over the last decade or so as markets have priced in expectations of ever-increasing returns long into the future. As that has happened, their valuations have ballooned along with their market capitalisation, leading to the US market becoming dominated by technology megacaps trading at significantly higher multiples than their global counterparts.

They are also overvalued compared to other US stocks. Specifically, the S&P 600, a preferred quality small cap benchmark, trades at around 15.5-16 times earnings (according to Bloomberg data from January), compared to the S&P 500 which trades at around 25 times (as of 13 February).

“After a decade dominated by mega caps and narrow market leadership, the pieces might be falling into place for US small caps,” said Christopher Colarik, small cap portfolio manager at asset manager Aberdeen Investments.

There are several tailwinds playing out in favour of US small caps.

Firstly, US small caps are improving their profitability faster than their larger counterparts. Analysis of FactSet Research Systems data from investment manager T. Rowe Price shows that S&P 600 firms increased their trailing earnings per share substantially during the second half of 2025, while those of S&P 500 firms stagnated.

This should continue as smaller, more domestically-focused stocks are likely to benefit from policy initiatives like Donald Trump’s ‘One Big Beautiful Bill’ that aim to boost America’s domestic economy.

The macroeconomic backdrop is also favourable. US interest rates are falling, with the Federal Reserve likely to become more dovish under Trump’s pick for its next chair, Kevin Warsh.

Lower interest rates tend to disproportionately benefit small cap stocks as they tend to hold more debt than larger counterparts.

Which US small cap stocks could you consider buying?

The S&P 600 gained 7.9% in the year to 18 February, closer to the performance of global non-US large cap stocks than the S&P 500.

Some of its top performers during the year so far have been:

Ichor Holdings (NASDAQ:ICHR), a company that designed and manufactures critical fluid delivery systems for semiconductor equipment. Its stock gained 134% in the year to 18 February.
Chemicals company Chemours (NYSE:CC) which gained 73% in the year to 18 February;
Electrical energy industry supplier Powell Industries (NASDAQ:POWL), which gained 54% in the same period.

But these industrial sectors, while posting spectacular gains so far this year, aren’t necessarily the best-poised for future gains.

“We’re looking at consumer-linked businesses, particularly those benefiting from rising discretionary spending,” said Colarik. “The unifying theme is profitable, well-capitalised companies in structurally improving industries, with earnings revisions trending higher.”

For an exchange-traded fund capturing US small cap stocks, you could consider buying the iShares S&P SmallCap 600 UCITS ETF (LON:ISP6) or the L&G Russell 2000 US Small Cap Quality UCITS ETF (LON:RTWP).

Investment trusts targeting US small caps include JPMorgan US Smaller Companies (LON:JUSC) and Brown Advisory US Smaller Companies (LON:BASC).

Dan is a financial journalist who, prior to joining MoneyWeek, spent five years writing for OPTO, an investment magazine focused on growth and technology stocks, ETFs and thematic investing.

Before becoming a writer, Dan spent six years working in talent acquisition in the tech sector, including for credit scoring start-up ClearScore where he first developed an interest in personal finance.

Dan studied Social Anthropology and Management at Sidney Sussex College and the Judge Business School, Cambridge University. Outside finance, he also enjoys travel writing, and has edited two published travel books.