[Marci McGregor speaking throughout]
[Music in background]
[Animated glitches containing various letters flip to spell out the following financial terms]
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Bear Market
Business Cycle
Risks
Bull Market
Fixed Income
Inflation
Equities
Diversification
Interest Rates
Opportunities
Geopolitics
Market Catalysts
Market Decode™
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On screen disclosures:
Please see important information at the end of this program. Recorded on 10/8/2025.
Despite ups and downs for a good chunk of this year, one often underappreciated asset class has recently been performing well… and may be primed for further potential growth.
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Marci McGregor
Head of Portfolio Strategy
Chief Investment Office
Merrill and Bank of America Private Bank
It's time to talk Small Caps… or companies with a market capitalization — that's the total value of the company's stock — between 250 million and 2 billion dollars. So let's decode what's happening now, and what it could mean for your portfolio.
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Small Caps = companies with market cap of $250M to $2B
Source: Investopedia
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Market capitalization = total value of a company's stock
There are a number of factors creating optimism for Small Caps.
First, there's monetary policy. The Federal Reserve's decision to begin cutting rates in September tends to be a positive for small firms, potentially lessening their debt load.
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Rate cuts tend to benefit smaller firms, potentially lessening debt load
And historically, following Fed easing, small caps have outperformed large caps on average in one-month, three-month, six-month, one- year and two-year spans since 1990.
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Vertical bars comparing average performance of small cap and large cap indexes in one-month, three-month, six-month, one-year and two-year spans on average since 1990.
Source: Bloomberg Data includes each Fed interest rate cut since 1990, as of September 16, 2025. Large-cap = S&P 500 index, Small-cap = Russell 2000 Index
Even before the cutting cycle began, in August, the Russell 2000 posted near record highs of 7.1 percent total return. That's the strongest monthly performance against the S&P 500 in over a year.
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Russell 2000, which tracks Small Cap stocks, posted near record 7.1% total return in August.
Source: Bloomberg data as of September 30, 2025
The small cap index continued to trend upwards in September with a monthly total return of 3.1 percent.
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Regime Indicator moves to "recovery" from "downturn"
Source: BofA Global Research, September 8, 2025
Another tailwind for Small Caps: Bank of America Global Research's U.S. Regime Indicator has crossed from "downturn" into "recovery" officially. That's been the best phase of the cycle for Small Cap performance through time.
And small caps have been revising-up their earnings guidance lately. Bank of America Global Research now believes small caps could outperform large caps on profit growth in the fourth quarter and through 2026.
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Risks for Small Caps:
- Weaker-than-expected economic data
- Potentially sticky inflation
- Lingering tariff uncertainty
Of course, there are risks to consider. If upcoming economic data comes in weak, that could disproportionately impact small caps… sticky inflation and lingering tariff uncertainty could also cause a hit compared to large-cap peers.
So weighing those risks against recent market performance, what's the big takeaway on Small Caps?
Given their relatively low current valuation — we see Small Caps well worth exploring for both potential growth and increased diversification in today's markets.
And that's the Market Decode.
On screen disclosures:
Important disclosures
The opinions expressed are as of 10/08/2025 and are subject to change.
Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.
Asset allocation, diversification, and rebalancing do not ensure a profit or protect against loss in declining markets.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.
This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.
The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., ("Bank of America") and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S" or "Merrill"), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation ("BofA Corp.").
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[End of transcript]
After a disappointing start to 2025, small cap stocks (generally defined as companies in the $250 million to $2 billion size range) have been outperforming large caps lately, and if history is any guide, that trend could continue. Since 1990, small caps have outperformed large caps on average in the one, three, six, 12, and 24 months after the Federal Reserve (the Fed) has cut interest rates.Footnote 1 Other factors that could contribute to their change in fortune are today's increase in mergers and acquisitions activity and more accommodating regulatory policies.
In the video above, Marci McGregor looks at the risks and potential opportunities small caps represent today and the role they could play in your portfolio. "Given their current low valuation, we see small caps as an asset class well worth exploring for both potential growth and diversification," says Marci McGregor, head of Portfolio Strategy for the Chief Investment Office, Merrill and Bank of America Private Bank.