The small-cap stock market has experienced a remarkable turnaround in recent years, with many stocks in the sector delivering significant returns. However, despite this renewed interest in small-cap stocks, one money manager believes that rising Treasury yields could pose a significant challenge to their growth in 2026.
The recent rally in small-cap stocks has been fueled by a combination of factors, including a shift in investor sentiment towards smaller, more agile companies, as well as improvements in the underlying fundamentals of the sector. According to data from the Russell 2000 index, which tracks the performance of the smallest publicly traded companies in the US, the sector has delivered a total return of over 100% in the past two years. This has been driven by a combination of factors, including strong earnings growth, lower valuations, and improving liquidity.
However, despite these improvements, one money manager believes that rising Treasury yields could be a significant roadblock for small-cap stocks in 2026. Rising yields can make borrowing more expensive for companies, which can have a negative impact on their profit margins and ultimately, their stock prices. This is particularly concerning for smaller companies, which often rely on access to cheap capital to fund their growth.
The problem is that Treasury yields have been rising steadily over the past year, driven by a combination of factors, including expectations of higher inflation and a stronger economy. This has led to a significant increase in the cost of borrowing for companies, which could have a negative impact on their profitability. According to data from the Federal Reserve, the yield on the 10-year Treasury bond has risen from around 1.5% in January 2023 to over 4% in December 2025.
Despite these challenges, the money manager believes that the fundamentals of the small-cap sector have finally started to improve. This is driven by a combination of factors, including strong earnings growth, lower valuations, and improving liquidity. According to data from the Russell 2000 index, the sector has delivered a total return of over 100% in the past two years, driven by a combination of factors, including strong earnings growth, lower valuations, and improving liquidity.
The money manager also points to the fact that small-cap stocks have historically performed well during periods of rising Treasury yields. According to data from the Federal Reserve, the Russell 2000 index has delivered a total return of over 10% per annum since 2000, despite a significant increase in Treasury yields over the same period.
However, the money manager believes that the current market environment is different from previous periods, and that the challenges posed by rising Treasury yields could be more significant. This is driven by a combination of factors, including the ongoing shift towards a more sustainable economy, as well as the increasing importance of ESG considerations in investment decisions.
So what does this mean for investors in small-cap stocks? The money manager believes that the key to success in 2026 will be to identify companies that are well-positioned to navigate the challenges posed by rising Treasury yields. This includes companies with strong balance sheets, low debt levels, and a proven track record of adapting to changing market conditions.
In terms of specific stocks, the money manager recommends a focus on companies in the technology and healthcare sectors, which have historically performed well during periods of rising Treasury yields. These sectors are also likely to benefit from the ongoing shift towards a more sustainable economy, as well as the increasing importance of ESG considerations in investment decisions.
In conclusion, while the record rally for small-cap stocks could run into a big problem in 2026, the fundamentals of the sector have finally started to improve. Rising Treasury yields could pose a significant challenge to the growth of small-cap stocks, but the money manager believes that the sector has the potential to deliver strong returns in the years ahead. As always, investors should approach the market with caution and do their own research before making any investment decisions.”
“What to Watch Next:
- Treasury yields continue to rise, reaching new highs in 2026
- Small-cap stocks face challenges in navigating a more expensive borrowing environment
- Investors focus on companies with strong balance sheets, low debt levels, and a proven track record of adapting to changing market conditions
Conclusion:
The small-cap stock market has experienced a remarkable turnaround in recent years, but the challenges posed by rising Treasury yields could be significant in 2026. Despite this, the fundamentals of the sector have finally started to improve, and the money manager believes that the sector has the potential to deliver strong returns in the years ahead.”
