Small cap stocks have outperformed larger stocks so far in 2026, according to index data. The MSCI World Small Cap Index returned 18.2% in 2026 through 25 August, while the core MSCI World Index gained 13.3% over the same period.
Abby Glennie, co-manager of the Aberdeen UK Smaller Companies Growth Trust, said small caps offer “a rare combination of attractive valuations, growth, and diversification.” She noted that smaller companies are trading at significant discounts to their historical valuation levels, and that investors may be looking to broaden out from mega caps as they become “increasingly nervous on the artificial intelligence (AI) trade.”
Valuations support the case. The MSCI World Small Cap Index had an average trailing price/earnings ratio of 18.4 as of July 2026, compared with 23.1 for the MSCI World Index, according to Morningstar. UK small caps trade even lower, at 15.6 times trailing earnings.
Glennie said the UK remains “especially compelling on valuations,” citing a prolonged period of investor neglect that has left valuations “substantially below both their own history and many international peers.” She added that many UK-listed small caps generate revenues overseas, offering international growth at a discounted price.
However, small caps carry risks. MSCI notes they can be more volatile and less liquid than larger stocks. Angeline Ong, senior investment analyst at IG, warned that without proper due diligence, investors “could be caught offside and end up nursing quite large losses,” and that liquidity could make it hard to exit positions quickly.