Will the software selloff affect US small caps?

In comparison to a global benchmark, US stocks have had the worst start to a year since 1995

However, some market segments, according to experts, are still worthwhile purchases.

The first few months of 2026 have seen a decline in US stocks. Comparing them to their international counterparts, Goldman Sachs' latest analysis indicates that they have had their worst start to the year since 1995.

The MSCI ACWI ex USA Index, which tracks large and mid-cap stocks in developed and emerging markets outside of the US, increased by 9.1 percent in the year ending February 18. The SandP 500, a good indicator of major US stocks, only increased by 0.5 percent during that time.

Fears that artificial intelligence (AI) stocks are in a bubble and that AI poses an existential threat to many of the software companies that make up the rest of the index have both contributed to the selloff in US stocks.

Several of the top software stocks in the US have been affected by the storm. Due to concerns that AI disruptors like OpenAI or Anthropic will destroy their business models, Salesforce (NYSE:CRM), ServiceNow (NYSE:NOW), and Adobe (NASDAQ:ADBE) all saw declines of 29.1%, 29.6%, and 24.8%, respectively, in the year ending February 18.

None of the Magnificent Seven AI giants have been exempt. Amazon (NASDAQ:AMZN) dropped 11.3 percent and Microsoft (NASDAQ:MSFT) dropped 17.3 percent during that time.

John Wyn-Evans, head of market analysis at wealth and asset management firm Rathbones, stated, "Even extremely profitable companies with robust balance sheets and extensive proprietary datasets are facing pressure." That change demonstrates how swiftly investor sentiment has shifted from the general AI-driven optimism of the previous year to a wave of pessimism that views the entire industry as vulnerable, regardless of fundamentals.

Are US small stocks about to rise?

The US market as a whole shouldn't be disregarded because of the big tech selloff. Since markets have factored in the expectation of steadily rising returns for the foreseeable future, large caps have surged in value over the past ten or so years. Technology megacaps now dominate the US market, trading at much higher multiples than their international counterparts, as their valuations have skyrocketed in tandem with their market capitalization.

Comparing them to other US stocks, they are also overpriced. According to Bloomberg data from January, the S&P 600, a preferred quality small cap benchmark, trades at approximately 15:516 times earnings, while the S&P 500 trades at approximately 25 times (as of February 13).

"The pieces might be falling into place for US small caps after a decade dominated by mega caps and narrow market leadership," said Christopher Colarik, small cap portfolio manager at Aberdeen Investments, an asset manager.

There are a number of favorable factors for US small caps.

The first is that US small-cap companies are becoming more profitable more quickly than their larger counterparts. examination of investment manager T's data from FactSet Research Systems. According to Rowe Price, S&P 600 companies saw a significant increase in trailing earnings per share in the second half of 2025, whereas S&P 500 companies saw no change in earnings.

This should go on since policies like Donald Trump's One Big Beautiful Bill, which are designed to strengthen the American economy, are likely to help smaller, more domestically oriented stocks.

The macroeconomic environment is favorable as well. The Federal Reserve is expected to become more dovish under Trump's choice for its next chair, Kevin Warsh, as US interest rates continue to decline.

Small-cap stocks typically benefit disproportionately from lower interest rates because they typically have higher debt levels than their larger counterparts.

Which small-cap US stocks might you want to purchase?

In the year ending February 18, the S&P 600 increased 79.9%, more in line with the performance of large-cap stocks outside of the US than the S&P 500.

These have been some of its best performers thus far this year.

Critical fluid delivery systems for semiconductor equipment are designed and manufactured by Ichor Holdings (NASDAQ:ICHR). In the year ending February 18th, its stock increased by 134%. Chemicals company Chemours (NYSE:CC) saw a 73 percent gain in the year ending February 18; Powell Industries, a supplier to the electrical energy sector, saw a 54 percent gain during the same time frame. These industrial sectors aren't necessarily the best-positioned for future gains, despite their impressive gains so far this year.

Colarik stated, "We're looking at consumer-linked businesses, particularly those that benefit from rising discretionary spending." "The common theme is that earnings revisions are trending higher for profitable, well-capitalized businesses in structurally improving industries.

The L&G Russell 2000 US Small Cap Quality UCITS ETF (LON:RTWP) or the iShares S&P SmallCap 600 UCITS ETF (LON:ISP6) are two exchange-traded funds that track US small cap stocks.

Two investment trusts that focus on US small caps are Brown Advisory US Smaller Companies (LON:BASC) and JPMorgan US Smaller Companies (LON:JUSC).