Resources/Weekly Insights

Volume 14, Edition 26 | August 18 - August 24, 2025

AI’s Reach: From Tech Titans to Small-Caps

Doug Walters, CFA

AI isn’t just for the tech giants—it’s reshaping how companies of all sizes operate. With small-cap stocks showing fresh strength, investors may be starting to see how this technology could level the playing field.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

Artificial intelligence has dominated headlines this year, often framed around the largest companies—the chipmakers supplying the infrastructure, or the firms training the most powerful models. But the more meaningful story may be how AI is filtering across the economy, touching businesses of every size and sector.

We see this firsthand. AI helps us analyze data more efficiently, generate insights more quickly, and serve our clients with greater speed and precision. The same is true for businesses across industries—from manufacturers using AI to optimize supply chains, to retailers deploying it for smarter inventory management, to service firms improving customer experiences.

Leveling the Playing Field

This accessibility matters. Large corporations have traditionally enjoyed an informational advantage: bigger teams, costly systems, and the resources to invest in new technology. But AI is changing that equation. Many of today’s tools are relatively inexpensive and scalable, meaning smaller firms can adopt them just as readily as industry giants. If that dynamic continues, it could help narrow the historical gap between large and small companies.

That brings us to the stock market. After lagging for much of the past two years, small-cap stocks have shown signs of strength in recent weeks. Part (and perhaps most) of the move reflects the Federal Reserve’s softened tone on interest rates, which eases pressure on debt-sensitive businesses. But part may also be forward-looking: investors recognizing that small firms stand to benefit from AI-driven productivity in ways they haven’t before.

Of course, AI won’t erase the challenges small companies face—cyclical pressures, competition, and the realities of scale are still very real. But the technology could act as an equalizer, allowing innovative small-caps to punch above their weight. For investors, that’s worth noting.

Markets have been quiet this summer, with major indexes continuing the steady climb from April’s lows. But beneath the calm surface, AI continues to reshape the business landscape. Are we investing in AI? It would be nearly impossible not to. It is touching most corners of the market. The better question is, “Who will be the biggest benefactors?” Only time will tell. But if past is prologue, it will not be who you think, and that’s okay. Our goal is to capture the benefits of AI, through a well-diversified portfolio including exposure to Momentum.*

* Momentum is a proven “factor” or stock characteristic. Research shows that stocks that are rising tend to continue to rise… momentum! Our evidence-based approach puts factors like momentum at the core of our portfolios.

1,972

Continuing Claims (‘000s)

Continuing unemployment claims ticked higher this week again. They are not high by historical standards, but the Fed doesn’t like they trend – rising steadily for the past four months.

Headline of the Week

From Patience to Possible – Powell Opens the Door

For much of this year, the Federal Reserve has preached patience—holding rates steady, emphasizing data dependence, and resisting the growing chorus for cuts. That tone shifted this week at the Fed’s annual conclave in Jackson Hole. The Fed Chair acknowledged what markets have been sensing: the balance of risks is changing. While inflation remains above target, the labor market is no longer the stable pillar it once was. Job growth has slowed, revisions have chipped away at prior strength, and signs of cooling are spreading.

Against that backdrop, Powell’s words flipped the script: “The shifting balance of risks may warrant adjusting our policy stance.” Translation—rate cuts are on the table for September. Other comments emphasized continuing inflation concerns. However, markets initially heard what they wanted to hear and wasted no time adjusting—futures priced in a near-certainty of easing, and equities rallied on the prospect of a gentler policy path.

The Fed’s dual mandate—price stability and maximum employment—has always been a balancing act. Friday’s message suggests the fulcrum is moving. For months, inflation dominated the conversation; now, employment concerns are muscling in. Whether this becomes a full pivot or a cautious step remains to be seen, but one thing seems clearer: patience is giving way to possibility.

The Week Ahead

Nvidia’s earnings and the Personal Consumption Expenditures (PCE) inflation report are the most important market developments heading into the Labor Day weekend.

All mixed up

The Federal Reserve’s preferred inflation measure, PCE next week, is expected to match the monthly inflation increase of 0.3% we saw from Consumer Price Index (CPI) earlier in the month.

Despite an elevated inflation reading in the Producer Price Index (PPI), the inputs that make up the core-PCE, which excludes volatile food and energy, are more mixed, which gives markets some comfort that inflation is not going to defy expectations on the upside.
For example, healthcare and insurance had moderate increases in price in the CPI & PPI reports as opposed to commodities, which were meaningfully higher.
Inflation projections have gotten good at pegging the PCE after dissecting CPI and PPI reports that are released earlier in the month, meaning markets are not ready for any surprises.

Four Trillion Dollar Question

When Nvidia Reports earnings on Wednesday, the whole investment world will be watching.

The AI driven momentum catapulted the chip company to a $4 Trillion market capitalization, moving it ahead of Microsoft and Apple as the biggest company in the S&P 500, with a weighting of around 8%, depending on the day.
Not only is it size in the S&P that matters, but it is also the outsized impact it has on the sentiment for Artificial Intelligence ecosystem.
Despite all the pageantry of the results and guidance, investors will be looking for insights into how the Chinese chip business will operate, after the 15% tax the U.S. government will charge on sales to the country and which products will be shipped and when to them.
Investors are expecting a beat and raise quarter, leaving little room for less than that.

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