I like this combination of high profitability and deep value.
I like this combination of high profitability and deep value.
U.S. stocks continue to power higher despite concerns about inflation, interest rates, government spending, and the war in Iran. Throughout the past year, soaring corporate earnings fueled by the artificial intelligence (AI) boom have been the support the equity market has needed.
The Russell 2000 had been leading the S&P 500 (^GSPC -1.09%) throughout the first three quarters of the year, but it started losing momentum around August. Small-caps are now trailing large-caps year to date, largely due to the disproportionate negative impact of high yields on smaller companies.
Profitable small-caps still look pretty intriguing, and they've got the benefit of cheap valuations to boot. That's why the Avantis U.S. Small Cap Value ETF (AVUV -0.30%) looks really attractive at the moment.
Small-cap earnings growth looks strong
The biggest reason we've seen small-caps lag throughout the AI boom cycle is that earnings growth has been middling to stagnant. But that's changed.
Current expectations are for small-cap earnings to grow by more than 20% year over year in both the third and fourth quarters of 2026. No longer are small company stocks "cheap for a reason." Today, they're cheap with a strong earnings growth story to back them. In terms of their respective risk/reward profiles, small-caps, in my opinion, are now ahead of large-caps.
Why AVUV is the best choice
The small-cap universe has a profitability problem. Roughly 40% of the Russell 2000 index's components are operating in the red. Those can actually outperform in risk-on conditions, as we saw earlier this year. But over the long term, they need the earnings to back them up.
AVUV American Century ETF Trust - Avantis U.s. Small Cap Value ETF
Averytin News Financial update.