US Small Caps: Why Earnings May Matter More Than Rates | Macro Moments

Franklin Templeton Institute's Michael Browne and Royce Investment Partners CIO Francis Gannon discuss the outlook for US small caps. They debate whether the small-cap cycle is already underway, whether higher interest rates matter as much as investors think, and why earnings growth, balance sheets and capital allocation may be more important than rates. The conversation also covers volatility, M&A and private equity activity, valuations relative to large caps and private equity, and the roles of reshoring, deregulation, tax changes and AI-related capital expenditure.

1. Francis Gannon argues that small caps remain a "forgotten asset class" and that improving earnings, attractive valuations and broadening market leadership could support the next phase of the cycle.
2. The discussion questions whether higher interest rates really mean a tougher outlook for smaller companies, with earnings growth, balance sheets and capital allocation presented as potentially more important.
3. It covers how active managers can use volatility to identify opportunities and what M&A and private equity activity are signalling in the small-cap market.
4. The role of reshoring, deregulation, tax changes and AI-related capital expenditure is discussed, with earnings framed as a possible key driver of the next phase of small-cap performance.