Brandon Nelson is betting that small-cap stocks will break out of a long stretch of underperformance and roar through 2027. The Calamos Investments portfolio manager named two financial services apps he expects to lead the way, according to a MarketWatch report.
Nelson runs a four-star rated fund at Calamos, the Naperville, Illinois-based asset manager. His thesis rests on a simple idea: smaller companies have lagged their larger peers for years, and that gap has left valuations too cheap to ignore.
Small-caps have trailed the S&P 500 for much of the past decade. High interest rates hit smaller firms harder because they carry more floating-rate debt and depend more on bank lending than mega-cap companies that sit on piles of cash.
That pressure is easing. The Federal Reserve has signaled it will keep cutting rates into 2026, which lowers borrowing costs for the companies Nelson favors. When financing gets cheaper, earnings at smaller firms tend to swing higher faster than at large ones.
Nelson's two picks sit in financial services apps, a sector he argues is still early in its growth curve. These are platforms that let consumers manage money, invest, and move cash without walking into a branch.
The logic behind the bet is straightforward. Financial apps earn fees on assets and transactions, so their revenue climbs when markets rise and consumer activity picks up. A small-cap rally would give those businesses a double push: more users and higher asset values.
Nelson is not alone in calling for a small-cap comeback, but the timing has been wrong before. Wall Street strategists have predicted a rotation into small-caps nearly every year since 2021, and each time large-cap tech absorbed most of the new money.
What is different now, bulls argue, is the rate path. Cuts are already underway, and small-cap earnings are expected to grow faster than large-cap earnings in 2026 for the first time in years, according to FactSet consensus estimates.
Nelson's fund carries a four-star rating from Morningstar, which puts it in the top tier of its category based on risk-adjusted returns. That track record gives his call more weight than the average forecast.
Investors who follow the pick should note the risk. Small-cap stocks swing harder in both directions than large-caps, and financial apps face heavy competition from banks and brokerages building their own digital tools.
Nelson's view, in short: the setup is in place, the valuations are low, and the payoff comes by 2027. Whether small-caps finally deliver is a question the next two years will answer.
