Resources/Weekly Insights

Volume 15, Edition 1 | January 12 - January 18, 2026

The Rising Importance of Size

Doug Walters, CFA

The Size factor highlights the potential of smaller and mid-sized companies to deliver strong long-term returns. With mega-cap valuations elevated, diversifying beyond the largest stocks may help reduce concentration risk and capture broader opportunities in the market.

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

The year has just begun (happy New Year!), but one of the quieter stories has been the strong start for the “Size” factor. That may not sound exciting at first glance, but it’s an important development—especially given today’s market backdrop.

What is size?

At its core, the Size factor reflects a long-observed tendency for smaller companies to outperform larger ones over full market cycles. This idea goes back decades in academic finance and is one of the foundational factors we advocate for in our evidence-based approach to investing. Size is not about chasing the smallest or riskiest stocks—it’s about systematically tilting portfolios away from the very largest companies and toward smaller ones, where expected returns have historically been higher.

Why size matters today

It’s no secret that market leadership has been extremely concentrated in recent years, with mega-cap stocks leading the way. They are a huge part of traditional indexes like the S&P 500 and have been driving performance. Valuations for many of these companies are elevated by historical standards. When a small group of very large companies dominates market returns, investors can easily end up taking on more concentration risk than they realize. Size can help counterbalance that risk.

Isn’t this just Small-Cap investing?

It’s also worth clarifying the difference between Size and Small-Cap, because they are often used interchangeably—but they are not the same thing.

Small-Cap refers to a specific segment of the market… companies with small market capitalizations. Think Shake Shack (SHAK), Crocs (CROX), and YETI (YETI), as opposed to their Large-Cap cousins McDonald’s (MCD), Nike (NIKE), and Walmart (WMT).

The Size factor, on the other hand, is… oddly enough… about removing size from the equation. Instead of owning, say, the traditional S&P 500 index, which is market cap weighted, someone wanting exposure to the Size factor would buy the S&P 500 Equal Weight index. That index owns all 500 constituents at an equal weighting when constructed. So, it is possible to have Size exposure even within the Large-Cap universe.

Back to today

With Mega-Cap stock valuations well above average, we can see the logic of diversifying into both Size and Small-Cap stock exposure. Both have had a great start to the year, likely driven by Large-Cap valuation concerns as well as expectations of additional Fed rate cuts which disproportionately benefit smaller companies that tend to rely more heavily on debt funding.

Time will tell where the market goes from here, but what we do know is Size isn’t about chasing the tiniest stocks—it’s about building a portfolio that isn’t overly dependent on a handful of giant companies. In today’s market, where mega-cap valuations are high and concentration risk is real, a thoughtful tilt toward smaller and mid-sized companies can help investors capture broader sources of return and reduce reliance on the few biggest names.

2.7%

CPI inflation held steady

Inflation stayed at 2.7%, continuing to defy expectations that economic forces would drive it higher.

Headline of the Week

Leaders and Laggards

The new year opens with an economy that seems to be moving in several directions at once. While the themes may be like last year, the mix seems to be more divergent. Early analysis points to the continued evolution of tariffs, labor markets, and investment flows. Tariffs and tighter immigration policies appear to be constraining labor supply, allowing unemployment to hover in the mid 4% range even as job creation slows and potential growth softens. At the same time, strong equity market gains through late 2025 have lifted household wealth at the top, supporting high-end consumption even as many lower income households still face affordability challenges.

AI related investment is another force contributing to this divergence. Spending on data centers and supporting infrastructure has reached levels high enough to materially influence GDP, with firms racing to secure chips, power, and capacity. This investment boom is providing pockets of strength despite softer labor market signals, and the lingering drag from tariffs. The result is an economy where some sectors are accelerating while others struggle to regain footing, a pattern that makes it harder to distill a single narrative about the year ahead.

For markets, this combination of wealth-driven consumption, uneven job growth, and policy-shaped constraints could make early 2026 feel unusually fragmented. As always, the challenge lies in assessing which forces will persist and which may fade as the year progresses. For now, the story appears less about a unified economic trajectory and more about the widening gap between the economy’s leaders and laggards.

The Week Ahead

Holiday shortened week, but jam packed with news flow. From economics to earnings, to central bank action, we got it all.

Oriental Trading Company

The week is bookended by economic data from the far east, with a Gross Domestic Product (GDP) report from China on Monday and a Bank of Japan rate decision on Friday.

China’s GDP for the 4th quarter is expected to print a 4.5% expansion on a year-over-year basis and 5% for the full year.
Economists expect that industrial production will do all the heavy lifting, while fixed asset investment and the consumer exhibit weakness.
China has been able to overcome tariffs and bank a record $1.2 Trillion trade surplus in 2025, that helped them hit the 5% target.
While the Bank of Japan is not expected to move rates from 0.75% on Friday, the Governor’s remarks and the central bank’s economic projections will certainly be used to project the next hike.

Swiss Miss

Davos, the week-long ski retreat in Switzerland for policy makers and corporate executives has begun.

The World Economic Forum is next week and will create a headline or two.
The economic agenda includes a focus on seeking a new model for resilient, competitive, and inclusive growth in an uncertain macroeconomic environment.
However, geopolitics and AI innovation will dominate the gathering.
There are many side meetings during the week as well.
You can always count on headlines from The President, who is attending in person as opposed to via video last year.

Inflation Systems Inc.

The Personal Consumption Expenditures Index (PCE) will provide an inflation reading and is expected to offer no contradiction to the current status quo.

While the number should play heavily in Federal Reserve’s rate decision at month end, expectations are no action from the central bank as inflation is range-bound, but above 2%.

American Standard

Week two of earnings season, lacks the AI sizzle, but will give a nice read on some extremely big blue chips.

Big regional banks like US Bancorp follow up the major money center banks from week one, but industrial and consumer companies Johnson & Johnson, Procter & Gamble, General Electric (Aerospace), 3M and Intel should be standouts.
The most widely anticipated earnings report comes from Netflix on Tuesday, whose stock is down over 25% in the past 3 months.
Netflix is expected to report a nearly 30% jump in earnings and almost 17% increase in revenue from last year, but the pursuit of a merger with Warner Brothers will dominate the release.

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