Valuations are low, tax laws have shifted, and technical trends are turning—Wall Street is starting to reconsider the small-cap space.
The Russell 2000 index – as tracked by the iShares Russell 2000 ETF (NYSE:IWM) – has lagged large-cap indices in 2025—but a potential shift might be just around the corner.
In a note published Wednesday, LPL Financial’s chief equity strategist Jeff Buchbinder laid out five catalysts that may favor small-cap equities heading into late 2025.
“Small cap equities remain one of the most paradoxical asset classes — frequently dismissed yet frequently cited as a contrarian buying opportunity on attractive valuations but often dissed by markets,” Buchbinder said.
1. Trump’s Tax Overhaul May Boost Small Cap Profits
LPL highlights that under the One Big Beautiful Bill Act, small businesses will be “once again permitted to fully deduct domestic research and development (R&D) expenses in the year they’re incurred.”
The deduction applies to software development and product innovation, and “should serve to significantly benefit smaller businesses… and thus increase net profits.”
LPL adds that “the increase in allowable deductions of interest costs and permanent 100% bonus depreciation” could favor smaller firms more than large caps.