While these trade disputes pose risks, they also present unique opportunities for certain US small-cap companies.

At the core of Trump’s tariff policies is the goal of protecting American industries and reducing trade deficits. Measures that will undoubtedly disrupt global supply chains, drive up the cost of imported goods, and create challenges for businesses reliant on foreign materials. They are expected to, however, incentivize domestic production, potentially benefitting small-cap companies that can step in to replace diminished imports.

While not all firms will benefit, we believe companies with resilient business models, pricing power, and strong balance sheets will be best positioned to navigate these economic shifts.

Reshoring and supply chain reconsiderations

One of the primary ways tariffs could benefit small-cap companies is through the reshoring of manufacturing capacity. As tariffs make foreign goods more expensive, many US firms are adapting supply chain strategies to increase domestic sourcing and production. This shift presents new opportunities for smaller companies across a variety of sectors.

For instance, reshoring projects will drive demand for local construction crews, concrete suppliers, and equipment rental firms. Regional banks will play a key role in financing these initiatives. Meanwhile, new semiconductor facilities will require specialized HVAC systems with nearby maintenance and repair services. By positioning themselves within these expanding domestic supply chains, small-cap companies stand to benefit from stronger revenue and earnings growth.

Tariff-driven innovation and efficiency

Additionally, tariffs have spurred innovation and efficiency improvements among small-cap companies. Many businesses are investing in automation, advanced manufacturing techniques, and other innovations to offset rising material costs to enhance productivity. These efforts help maintain margins and better position small-cap companies for long-term success. This is especially relevant for technology and industrial companies leveraging innovation to reduce dependence on foreign inputs and strengthen their competitive position.

Reshaping the competitive landscape

Counter-tariffs imposed by other nations in response to Trump’s policies have also played a role in shaping the competitive landscape.

Countries like China have targeted US exports, impacting industries such as agriculture and automotive. While some small-cap exporters face headwinds, others have successfully pivoted to alternative markets. We believe companies that can adapt to shifting trade dynamics and diversify their customer base will be best positioned to thrive.

The economic environment remains supportive

While we are mindful of the risks associated with recent policy actions, the broader economic environment remains supportive of high-quality small-cap stocks.

Despite geopolitical uncertainty, GDP growth is expected to remain in positive territory. Also, many companies have already strengthened operations in response to past disruptions, such as the pandemic and volatility during Trump’s first term. These efforts, such as diversifying supply chains and implementing efficiency initiatives, have better-positioned businesses to navigate potential tariffs and raw material inflation.

Overall, the US economy is expected to continue expanding, albeit at a more modest pace. This environment allows resilient small-cap companies to capitalize on the new administration’s “America First” agenda while leveraging recent operational enhancements to mitigate near-term risks.

… Along with earnings growth

As we move through 2025, small-cap stocks are gaining attention for several reasons. Investors are increasingly looking to diversify, given the growing concentration of “Big Tech” in large-cap indices. The shift is timely, as small-cap companies are expected to deliver stronger earnings growth relative to their large-cap counterparts (Chart 1). This is an important development as small-cap growth rates have lagged large-caps for several years.

… And attractive valuations

Furthermore, small-cap stocks are trading at attractive valuations, with their discount to large-caps near historic lows (Chart 2).

While multiple factors have contributed to this valuation gap, earnings growth differentials have been key drivers. As small-cap earnings accelerate, this discount should begin to narrow, presenting a compelling opportunity for investors.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.

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