Scott Chronert on Small & Mid-Cap Stock Opportunities and the AI Trade

Small and Mid-Cap Stock Opportunities

• 🎯 Scott Chronert favors small and mid-cap stocks, arguing that the market is increasingly focused on 2026 earnings growth expectations.
• 📈 Consensus estimates show small and mid-cap earnings growth moving from low single digits this year to low double digits next year.
• 💡 Companies in the small and mid-cap space that have raised guidance have seen outperformance relative to the S&P 500.
• 🚀 The setup for small and mid-caps is becoming more constructive as the market moves past policy noise and potentially benefits from Fed rate cuts.

Drivers of Small and Mid-Cap Earnings Growth

• ⏪ Small and mid-cap stocks are coming off two years of declining earnings, creating easier comparisons.
• ⚖️ These companies generally have higher economic sensitivity compared to large caps, positioning them well as the economy improves.
• 📊 The underlying macro environment, aside from the AI-driven large-cap segment, has seen an earnings recession, which is now potentially reversing.

The AI Trade and Volatility

• ⚡ The AI trade is expected to persist with good line of sight for capital expenditure spending through the end of the decade.
• ⚠️ However, the magnitude and speed of AI spending will lead to ongoing bouts of volatility, requiring careful stock selection.
• 💻 While overweight in semis and software within the AI playbook, there's a need to be more focused on specific areas.
• 📈 Companies not directly associated with AI but implementing AI processes are expected to see higher productivity, margins, and profitability in the long term.