The year 2026 began with strong optimism as the S&P 500 hit the level of 6,976, only to slide to 6,528 three months later.The index even hit a low of 6,316 at some point in March. The sentiment was hurt massively due to the Iran war. However, hopes of diplomacy offered some support to close out Q1.
Against this war backdrop, small-cap exchange-traded fund iShares Russell 2000 ETF IWM has advanced about 0.2% over the past month (as of April 2, 2026). In contrast, State Street SPDR S&P 500 ETF Trust SPY has lost about 2.5%. Over the past week (as of April 2, 2026), both SPY and IWM ETFs have added around 2.1% each.
Does this mean that small caps are better-positioned than large-caps in the current environment? Let’s find out.
Geopolitical Tensions
The past month has been dominated by the Iran war. Trump said on April 7, 2026, that he agreed to a two-week “double-sided ceasefire” with Iran just hours before his deadline for a deal or major strikes. However, the truce looked increasingly fragile, as Iran’s semiofficial Fars news agency reported that tanker traffic had been “halted” amid Israel’s ongoing strikes in Lebanon.
Meanwhile, The Wall Street Journal said Iran had informed mediators it would restrict ship crossings to roughly a dozen per day — a sharp drop from the more than 130 vessels that transited daily before the conflict, as quoted on Yahoo Finance.
Note that large-cap stocks are always more export-centric and hence internationally focused. Stocks with a major international focus may underperform in a war-like scenario, while stocks with a domestic focus — primarily small-cap ones — should navigate geopolitical tensions in a better way.
Current Energy Crisis Is Less Likely to Affect United States
The United States is one of the world's top oil producers and exporters, which earned it the tag of a net exporter of energy products. Thanks to the shale oil boom, the United States has managed this status.
Although U.S. crude oil exports fell 3% in 2025 from 2024, marking the first annual drop since 2021 (per the U.S. Energy Information Administration), the country exported 4.0 million barrels of crude oil per day, 85 times as much as in 2011, as reported by Reuters.
Despite expectations of a resolution to the Iran war, risks remain significant. Damage to energy infrastructure could take years to repair. Hence, we do not expect the oil to return to the pre-war levels soon. Whatever the case, being a net energy exporter, the United States should not face the fury of the ongoing energy crisis.
The United States should also not face high inflationary pressure due to the energy crisis, as the region is sufficiently energy-rich. If the energy-led inflation doesn’t bother the U.S. economy, small caps appear better-positioned.
No Rate Hike by the Fed in the Near Term?
Fed Chairman Jerome Powell recently stated that long-term inflation expectations remain stable despite the latest oil-induced price pressures. He noted that the monetary policy is “in a good place” to adopt a wait-and-see approach, dampening expectations of aggressive rate hikes.
A less hawkish or dovish Fed policy is good for the small-cap stocks as those companies will be able to borrow at cheaper rates (read: Should You Buy Gold ETFs on Fed's Assurance?).
Positive Earnings Momentum of Small Caps
U.S. small-cap earnings are showing signs of a rebound. The S&P 600 index is expected to record 10.4% positive earnings growth in Q1 2026, up from 4.3% growth recorded in Q1 2025 and 3.9% growth reported in 4Q 2025, per the Earnings Trends issued on March 25, 2026.
The trend has been similar for revenue growth. The S&P 600 Index is expected to post 4% positive revenue growth in Q1 2026, up from 2.4% growth recorded in Q1 2025 and 3.1% growth reported in 4Q 2025.
A Roller-Coaster Ride for the U.S. Dollar
The dollar strengthened, following the start of the Iran war. Invesco DB US Dollar Index Bullish Fund UUP is up 2.8% this year (as of April 2, 2026) while the ETF has gained 1.4% past month and 0.1% past week. Any strength in the greenback is good for smaller-cap stocks, as they have less foreign exposure and don’t have to bear the brunt of negative currency translations.
What Does Small-Cap Stock Valuation Say?
The Russell 2000 currently trades at a P/E (trailing 12-month) multiple of 35.52X, according to WSJ. However, the index trades at a forward P/E of 24.15X, which points to earnings growth.
But then, small caps are not cheap. The forward P/E of the Nasdaq 100 is 22.69X (at the time of writing), higher than the Russell 2000. The same metric for the S&P 500 is 20.31X, again higher than the Russell 2000.
ETFs in Focus
ALPS Medical Breakthroughs ETF SBIO, Innovator U.S. Small Cap Power Buffer ETF – April KAPR, Themes US Small Cap Cash Flow Champions ETF SMCF and Invesco S&P SmallCap Value with Momentum ETF XSVM are some of the small-cap ETFs that have gained over the past month (as of April 2, 2026).
SBIO has surged 7.3%, KAPR has added 2.7%, SMCF has gained 2.2% and XSVM has advanced about 2.65% over the past month.
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State Street SPDR S&P 500 ETF Trust (SPY): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
ALPS Medical Breakthroughs ETF (SBIO): ETF Research Reports
Invesco S&P SmallCap Value with Momentum ETF (XSVM): ETF Research Reports
Themes US Small Cap Cash Flow Champions ETF (SMCF): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).