AI and Security Drive Small-Cap Stocks
A cluster of emerging growth small-cap stocks are reportedly seeing momentum as they move from pilot programs to operational scale. An analysis suggests that key drivers behind this trend include developments in artificial intelligence, advanced materials, and enterprise security.
- After a prolonged period of underperformance, U.S. small-cap stocks began to rally in late 2025, with the S&P SmallCap 600 Index returning 8.95% between the end of October 2025 and January 27, 2026, compared to just 2.33% for the large-cap S&P 500. - The global advanced materials market is projected to grow from approximately $91-98 billion in 2025-2026 to over $134 billion by 2030, with key drivers including the aerospace, defense, and automotive industries. - While early AI benefits favored large-cap tech companies, spending is now spilling over to smaller firms that provide essential infrastructure and apply AI for productivity gains within their own operations. - One example of a small-cap benefiting from the AI boom is TSS Inc., which partners with Dell to integrate AI-enabled server racks; its revenue grew 410% in the first half of 2025. - The enterprise IT security market is expected to expand at a compound annual growth rate (CAGR) of 9.3% from 2026 to 2034, driven by evolving cyber threats and technological advancements. - Analysts predict that small-cap earnings growth will outpace that of large-caps in 2026, fueled by factors like lower interest rates, fiscal stimulus, and reshoring trends. - Specific small-cap companies are seeing operational momentum, such as Kraig Biocraft Laboratories, which is targeting a monthly output of 10 metric tons of its recombinant spider silk, and Gaxos.ai, which secured a deal with ByteDance's enterprise division, BytePlus. - The information security market is forecast to grow from $75.42 billion in 2026 to $88.83 billion by 2031, with managed security services being a particularly fast-growing segment.
