NEW YORK — Small-cap stocks will see a strong rally through 2027, say several money managers who point to improving corporate earnings and fair valuations. This outlook follows a period where the Nifty Smallcap 250 index gained about 15 percent over the last six months, outperforming the Nifty 50.
Brandon Nelson, a fund manager at Calamos Investments, sees strong upside for small-cap stocks, citing robust earnings growth and attractive valuations as key drivers.
Analysts project strong growth for Russell 2000 companies, with expectations of 54 percent annual growth in 2026 and 32 percent in 2027. This forecast supports the optimism from managers like Nelson.
Among specific small-cap picks, Iren (NASDAQ: IREN) stands out. The company concluded its fiscal 2026 fourth quarter with $1 billion in operating annual recurring revenue. Iren projects its annual recurring revenue will reach $4 billion by the close of 2026.
Iren operates within the neocloud thesis, supplying hyperscalers with data center infrastructure, including chips, power, software and facilities. This positions the company directly within the growing demand for compute resources.
Nebius (NASDAQ: NBIS) also emerges as a strong contender. Nebius holds a lead over Iren in revenue recognition, although its market capitalization is currently almost four times that of Iren.
Varun Goel, senior fund manager at Mirae Asset Mutual Fund, said the small-cap segment dealt with a challenging period marked by an earnings slowdown, tariff uncertainty and Middle East tensions. During this time, Mirae Asset Mutual Fund's small-cap fund surpassed 5,000 crore rupees in assets under management within 18 months of its launch.
Anil Rego, founder of Right Horizons PMS, explained that small-cap returns were largely flat for two years leading up to March 2026. This period saw earnings growth moderate in the first half of fiscal year 2026 and markets contend with macro headwinds, leading to a meaningful correction.
Rego added that sound businesses traded at attractive valuations during this correction. Since March 2026, global uncertainties have eased, investor sentiment has improved and earnings have recovered since the second half of fiscal year 2026, specifically in the third quarter of fiscal year 2026.
While the recovery since March 2026 is encouraging, Rego cautions that the entire small-cap universe will not move in tandem. He warns that a 5-8 percent correction is possible due to lingering macro uncertainties, but maintains that markets have bottomed out as earnings momentum continues.
Rego advises investors to be selective in their small-cap allocations rather than adopting a broad approach. The focus remains on identifying quality businesses with strong fundamentals that can capitalize on the improving earnings environment and reasonable valuations.
