The investment landscape has shifted significantly in recent months. Trade tensions have escalated and geopolitical relationships have come under strain, prompting many investors to question assumptions that have underpinned global markets for decades. In this article, we explore what’s changed – and what hasn’t – in the US smaller companies market. And we explain why, even in a more uncertain world, there are still reasons for long-term investors to remain confident.
An era of unpredictability
The election of Donald Trump as US President for his second term has brought with it a heightened degree of policy uncertainty, a more confrontational stance on international affairs and a domestic agenda that has understandably raised serious concerns for many. Inevitably, this has prompted significant volatility across all asset classes.
In particular, trade policy has taken a more aggressive turn. The new wave of tariffs announced on “Liberation Day” marked a clear escalation in protectionism. While the full scope and longevity of these measures remain unclear, this inevitably means higher input costs, disrupted supply chains and greater complexity in planning for many companies – especially those in globally integrated sectors. It’s a sharp departure from the low-friction trade environment that investors have become accustomed to in recent decades.
At the same time, America’s more confrontational stance on the global stage has caused unease among allies and investors alike. Diplomatic ties have come under pressure, with key partners unsettled by policies that appear more focused on national interest than international cooperation.
Political uncertainty can have tangible economic consequences too. Most analysts assume that tariffs will weigh on the global economy and, even with question marks over their legality and scope, the lack of clarity has already caused business investment to slow. Consumer sentiment has also taken a knock. The US economy is still growing, but momentum has clearly faltered. In normal circumstances, that might prompt the Federal Reserve to lower interest rates – but the inflationary nature of tariffs, combined with the wider political uncertainty, makes it much harder to deliver monetary stimulus in the current environment.
Reasons for optimism
That said, it’s not all bad news for smaller companies. With a greater domestic focus, US small caps are less exposed to global trade tensions and international capital flows. And if President Trump fulfils his election promises of tax reform and deregulation, smaller businesses stand to benefit most.
Importantly, there is also significant valuation support for US smaller companies. The intense focus on a handful of mega cap technology stocks in recent years has essentially meant the rest of the market has been starved of capital. As a result, US smaller companies now look attractively valued, particularly from a relative perspective. For example, Apple now has a market capitalisation larger than the entire Russell 2000 Index1. It wouldn’t take much of a rotation out of the mega caps to make a meaningful difference lower down the market cap spectrum.
Lean on what has worked in the past
Over the long run, US smaller companies have demonstrated the ability to deliver exceptional returns and outperform their larger counterparts. Occasionally, that relationship breaks down, as it has in recent years. Markets then tend to become highly concentrated in the narrow set of large cap stocks that are driving the narrative. We saw this in the early 1970s, during the rise of the so-called ‘Nifty Fifty’, and again in the run-up to the dotcom bubble in the late 1990s. Eventually, something shifts – and history shows that smaller companies then go on to outperform for several years, as the normal relationship reasserts itself. The catalyst for that shift isn’t always obvious, but this time, hindsight may indicate that the return of President Trump to the White House marked the start of another such turning point.
As we explored in “the case for US smaller companies”, one of the main reasons why smaller companies outperform over time is that they have a longer runway of growth ahead of them. They are also generally nimbler than their larger cap counterparts, which could be a real asset in the current uncertain environment. Meanwhile, their smaller size means they are less well-followed by the broader investment community, leading to an abundance of valuation anomalies for astute active stock pickers to capture.
It is a part of the market that requires discipline, however, because company-specific risk and volatility can be higher. The team behind the JPMorgan US Smaller Companies Investment Trust (JUSC) has been applying the same investment approach for nearly twenty years. By focusing on well-managed, cash-generative businesses with durable competitive advantages and compelling growth prospects, they have built an impressive long-term track record through a wide range of market conditions.
Crucially, the foundations of that success have remained consistent. Quality, valuation discipline, a focus on the long-term and robust risk management are central to the process. There is no attempt to chase short-term trends or respond to changes in sentiment. In periods when fundamentals are the primary driver of returns – as they are over the long term – that approach tends to be rewarded. In more momentum-driven environments, or when sentiment temporarily outweighs fundamentals, the trust may lag. But the process is designed to deliver through the cycle – and it has historically produced attractive returns over time and consistent outperformance of the index. Indeed, JUSC was recently identified in a Trustnet article as one of the UK's most consistent regional investment trusts, based on its Sharpe Ratio2.
In the current environment, that kind of discipline should come into its own. The market backdrop may be uncertain, but the drivers of success in this part of the market haven’t changed – and nor has JUSC’s ability to capture them.
Conclusion – the case for investing in the heart of America remains robust
The backdrop for investors has undoubtedly changed. Trade dynamics, geopolitics and policy uncertainty are all contributing to a more complex and volatile environment. But investors can still rely on some constants. The United States remains one of the most innovative and dynamic economies in the world, and company-level fundamentals continue to matter.
Within that broader context, US smaller companies offer a compelling combination of domestic focus, greater flexibility and a clear valuation advantage over their large-cap peers. With market concentration beginning to ease, this part of the market is well placed to benefit.
Of course, there are no guarantees. We are in uncharted territory, and it’s not hard to envisage scenarios where all US assets come under pressure, regardless of size or quality. But the case for investing in the heart of America – through its vibrant smaller companies sector – remains robust. And JUSC’s disciplined approach, grounded in quality, valuation and conviction, continues to offer a consistent and effective way to capture the opportunity.