Small-cap stocks have struggled in early 2025, hurt by trade tensions and economic sensitivity, but a broadening equity market may set the stage for recovery. Despite current volatility, small-caps could benefit from their domestic focus—nearly 80% of Russell 2000 revenues come from within the U.S.—which offers insulation from global trade disruptions. 

Historically, small-caps have outperformed during periods when large-cap dominance fades, and current signs of market broadening echo those conditions. To navigate uncertainty, investors should favor high-quality small-cap stocks with strong fundamentals, as they tend to hold up better in downturns and outperform in recoveries. 

Market timing, however, remains risky, missing just a few key months can erase most gains, making long-term commitment crucial. 

Finsum: Patient investors who focus on quality and use active management may be best positioned to capture small-cap upside as market conditions evolve.