IBKR Podcasts Why Are Large Caps Winning While Small Caps Catch Up?
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Mar 30, 2026 Michael Normile, NASDAQ market commentator and researcher, explains divergent earnings cycles and market trends. He contrasts large-cap strength driven by AI, cloud and lower interest burdens with small-cap recovery from easing inflation and wage pressures. He discusses sector concentration, monetary policy effects on valuations, and what could sustain or threaten each group’s momentum.
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Different Engines Behind Similar Earnings Numbers
- Large caps and small caps show similar headline earnings growth but from different engines.
- Nasdaq 100 posts 17% Q4 growth and 11 quarters of 15%+ driven by AI, cloud, and ad strength while small caps only recently turned positive after an 11-quarter earnings recession.
Why Small Caps Felt the Brunt of Inflation and Rate Hikes
- Small caps endured an earnings recession from Q3 2022 to Q1 2025 due to inflation, tight labor, and rising borrowing costs.
- Their average borrowing cost rose from ~4.7% to 7% and interest expense consumed ~44% of EBIT, magnifying margin stress.
Large Caps Are More Rate Resistant Than They Look
- Large caps were relatively insulated from macro headwinds because of higher margins and fixed-rate financing.
- NASDAQ 100 interest expense was about 9% of EBIT versus 44% for small caps, reducing sensitivity to rate spikes.