Before we discuss the silver economy, let’s talk about the markets as we are at the mid-year mark.

Rumbling grows louder and louder that we are in stock market euphoria. By many metrics, including trading volume, margin debt and multiples, in our view, this is shaping up to be one of the biggest stock market bubbles in history.

If we go back to 2000, we had a different market composition.

• Passive investing was less than 20% – today, it is over 50%.
• Retail share of trading was less than 10% – today, it is above 20%.
• There were no leveraged ETFs, zero-day options, etc.
• Hedge funds managed around $600 billion – that number is now above $6 trillion.
• Active managers were mainly fundamental bottom-up, split about equally between value, growth and core.
• Systematic investing (quantitative funds) accounted for the management of $200 billion – today, around $2 trillion.

So, what happens when this bubble deflates? In our view, today’s market structure differs materially from prior cycles, making historical comparisons more challenging.

What is risk in this situation? Is it underperforming the market or is it losing money? Pension funds have an estimated rate of return of 6 or 7%. Should they look to reduce risk? Diversify their portfolio?

Diversification, quality and long-term opportunity

At Global Alpha, we believe in building true small cap portfolios, diversified by country, currency, sector and industries. At the same time, we remain exposed to different long-term secular industries. We buy quality companies, defined by stronger growth and margin profiles; with strong balance sheets and low debt.

Unfortunately, this approach has not been rewarded over the last few years. Not even for famed investors like Warren Buffet who underperformed the S&P 500 by 20% and the Nasdaq-100 by 30% year over year.

As he famously said, “Be fearful when others are greedy, and greedy when others are fearful.” Perhaps he viewed the overconcentration as others being greedy, which recalls another Buffet quote:

“Only when the tide goes out do you discover who’s been swimming naked.”

As investors clamoured to the top ten, the rest of the small cap universe was left a little stark.

On that note, there’s still opportunity in the markets, represented by the silver economy.

A trend that never gets old

From Japan to Italy to the United States and Canada, the world is facing the largest demographic shift in its existence. According to data from World Bank Group, about 16% of the current population (ex-Africa) is over 65. And 18% is less than 14. By 2050, it is expected that less than 15% of the population will be less than 14 and over 26% will be over 65.

World Bank Group also indicates that Japan is the globe’s fastest aging society. 35% of its population is over 65 years of age, with 6% of that older than 85. By 2050, more than 50% of the population will be above 65 years old.

Countries like Korea and Italy are not far behind. What does an aging, “silver” population mean for investments?

A population that is only getting older means that there are growth prospects for companies that offer or adapt their products to cater to that demographic.

In our portfolio, we have several names that are in that category:

• Extendicare Inc. (EXE CN): a Canadian operator of long-term care as well as one of the largest providers of home health care in Canada.
• Service Corporation International (SCI US): one of North America’s largest providers of death care services.
• Challenger Limited (CGF AU): one of the largest providers of annuities in Australia.
• Globus Medical Inc. (GMED US): a medical device company focused exclusively on spine disorders.

We also have many other companies in the portfolio who have a growing part of their revenues addressing this market. One such company is Shanghai Conant Optical Co. Ltd. (2276 HK), which is the second largest global manufacturer of optical lenses and a leading manufacturer of lenses for smart glasses.

We also own WeRide Inc. (800 HK, WRD US) a diversified, Robotaxis, Robobuses, Robovans, autonomous driving stack and software licensing, deployed globally in China, the Middle East and Europe.

Back to the top

Overall, while current markets may be expensive and structurally different from past bubbles, investors should focus on diversified, quality small-cap companies exposed to durable secular trends. Our team is constantly looking at thematics to identify long-term trends like this one of the silver economy.

The securities identified and described do not represent all securities purchased, sold or recommended for client accounts. It should not be assumed that investments in these securities were or will be profitable.

The post The silver economy: A secular opportunity appeared first on Groupe financier Connor, Clark & Lunn ltée.

Before we discuss the silver economy, let’s talk about the markets as we are at the mid-year mark.

Rumbling grows louder and louder that we are in stock market euphoria. By many metrics, including trading volume, margin debt and multiples, in our view, this is shaping up to be one of the biggest stock market bubbles in history.

If we go back to 2000, we had a different market composition.

• Passive investing was less than 20% – today, it is over 50%.
• Retail share of trading was less than 10% – today, it is above 20%.
• There were no leveraged ETFs, zero-day options, etc.
• Hedge funds managed around $600 billion – that number is now above $6 trillion.
• Active managers were mainly fundamental bottom-up, split about equally between value, growth and core.
• Systematic investing (quantitative funds) accounted for the management of $200 billion – today, around $2 trillion.

So, what happens when this bubble deflates? In our view, today’s market structure differs materially from prior cycles, making historical comparisons more challenging.

What is risk in this situation? Is it underperforming the market or is it losing money? Pension funds have an estimated rate of return of 6 or 7%. Should they look to reduce risk? Diversify their portfolio?

Diversification, quality and long-term opportunity

At Global Alpha, we believe in building true small cap portfolios, diversified by country, currency, sector and industries. At the same time, we remain exposed to different long-term secular industries. We buy quality companies, defined by stronger growth and margin profiles; with strong balance sheets and low debt.

Unfortunately, this approach has not been rewarded over the last few years. Not even for famed investors like Warren Buffet who underperformed the S&P 500 by 20% and the Nasdaq-100 by 30% year over year.

As he famously said, “Be fearful when others are greedy, and greedy when others are fearful.” Perhaps he viewed the overconcentration as others being greedy, which recalls another Buffet quote:

“Only when the tide goes out do you discover who’s been swimming naked.”

As investors clamoured to the top ten, the rest of the small cap universe was left a little stark.

On that note, there’s still opportunity in the markets, represented by the silver economy.

A trend that never gets old

From Japan to Italy to the United States and Canada, the world is facing the largest demographic shift in its existence. According to data from World Bank Group, about 16% of the current population (ex-Africa) is over 65. And 18% is less than 14. By 2050, it is expected that less than 15% of the population will be less than 14 and over 26% will be over 65.

World Bank Group also indicates that Japan is the globe’s fastest aging society. 35% of its population is over 65 years of age, with 6% of that older than 85. By 2050, more than 50% of the population will be above 65 years old.

Countries like Korea and Italy are not far behind. What does an aging, “silver” population mean for investments?

A population that is only getting older means that there are growth prospects for companies that offer or adapt their products to cater to that demographic.

In our portfolio, we have several names that are in that category:

• Extendicare Inc. (EXE CN): a Canadian operator of long-term care as well as one of the largest providers of home health care in Canada.
• Service Corporation International (SCI US): one of North America’s largest providers of death care services.
• Challenger Limited (CGF AU): one of the largest providers of annuities in Australia.
• Globus Medical Inc. (GMED US): a medical device company focused exclusively on spine disorders.

We also have many other companies in the portfolio who have a growing part of their revenues addressing this market. One such company is Shanghai Conant Optical Co. Ltd. (2276 HK), which is the second largest global manufacturer of optical lenses and a leading manufacturer of lenses for smart glasses.

We also own WeRide Inc. (800 HK, WRD US) a diversified, Robotaxis, Robobuses, Robovans, autonomous driving stack and software licensing, deployed globally in China, the Middle East and Europe.

Back to the top

Overall, while current markets may be expensive and structurally different from past bubbles, investors should focus on diversified, quality small-cap companies exposed to durable secular trends. Our team is constantly looking at thematics to identify long-term trends like this one of the silver economy.

The securities identified and described do not represent all securities purchased, sold or recommended for client accounts. It should not be assumed that investments in these securities were or will be profitable.

The post The silver economy: A secular opportunity appeared first on Groupe financier Connor, Clark & Lunn ltée.

Chart 1

From a cyclical perspective, housing indicators remain weak, while the stockbuilding cycle appears to be reaching a peak, with a downswing likely to extend well into 2027.

The optimistic case is that real money growth will be supported by a reversal of the H1 boost to inflation from higher energy prices, assuming that the reopening of the Persian Gulf proves lasting, while the business investment cycle remains in an upswing driven by seemingly insatiable demand for AI compute. Still, upward pressure on financing costs from the vast spending could start to constrain momentum soon, while the disinflation lift to real money growth could be offset by slower nominal expansion, reflecting H1 interest rate rises.

A conservative view of equity market prospects, therefore, appears warranted, as least until monetary indicators give an “all-clear” signal. The cyclical framework employed here suggests that equities will perform poorly over the medium term: weak phases in the three investment cycles are scheduled to coincide at some point in 2027-28,  a condition historically associated with major bear markets.

An important recent change has been a divergence of money growth across major economies, with US expansion picking up to a level inconsistent with 2% inflation, in contrast to weakness in Europe and Japan – see charts 2 and 3. This suggests superior US near-term economic prospects and a need for opposite monetary policy adjustments. If forthcoming, these could sustain a recent recovery in the US dollar, likely acting as another headwind for markets.

Chart 2

Chart 3

US monetary acceleration gathered pace after the Fed’s December decision to resume balance sheet expansion, a policy that Chair Warsh wants to reverse. Action is unlikely before late 2026 but – if combined with a near-term interest rate rise – could cause money growth to slow sharply in H1 2027.

Despite US strength, global annual broad money growth is below its pre-pandemic (i.e. 2015-19) average, reflecting softness in China as well as Europe / Japan. This suggests that inflationary pressures globally will remain contained, even if US medium-term risks are rising.

The judgement that the stockbuilding cycle is peaking is supported by the global manufacturing purchasing managers’ survey, with an average of the finished goods inventories and stocks of purchases indices reaching its fifth highest level on record in May – chart 4. Downswings in the cycle were historically associated with underperformance of cyclical sectors – notably materials, financials and communication services – versus defensive sectors, especially health care and consumer staples.

Chart 4

Cycle fluctuations were also reflected in prices of production inputs including electronic components as well as industrial commodities. A coming downswing could challenge optimistic forecasts for medium-term earnings growth of chipmakers and other hardware suppliers.

The post A “monetarist” perspective on current equity markets appeared first on Groupe financier Connor, Clark & Lunn ltée.

CC&L Infrastructure is pleased to announce the release of its 2025 Responsible Investment Report and 2025 Climate Report.

The reports reflect our commitment to responsible investment and sustainable infrastructure, highlighting the initiatives undertaken across our portfolio over the past year. As long-term owners and active managers of infrastructure assets, we believe operating responsibly is fundamental to protecting and enhancing asset value while contributing to resilient infrastructure and stronger communities.

Today, our team of more than 45 professionals manages over $7.5 billion in infrastructure assets across transportation, social and renewable energy sectors, including approximately 2.4 GW of renewable energy capacity. As an employee-owned business, we invest alongside our clients, aligning our success with theirs and reinforcing our long-term approach to value creation.

The 2025 Responsible Investment Report highlights progress across our five Responsible Investment focus areas:

• Asset resilience: Strengthening the long-term resilience, reliability and performance of our infrastructure assets through active ownership, disciplined risk management and operational excellence.
• Climate & transition: Advancing our approach to climate risk assessment, emissions measurement and reporting while investing in renewable energy and supporting the transition to a lower-carbon economy.
• Shared value: Building long-term partnerships with local communities, Indigenous groups and other stakeholders to create lasting economic and social value where our assets operate.
• People focus: Maintaining a strong commitment to health and safety, fostering an inclusive workplace and supporting the employees, contractors and communities connected to our assets.
• Governing with integrity: Promoting strong governance, ethical business practices and transparent reporting to support accountability and informed decision-making.

The accompanying 2025 Climate Report provides an update on our approach to managing climate-related risks and opportunities across the portfolio. The report is aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which continue to underpin global best practices for climate reporting, and reflects our ongoing efforts to strengthen climate governance, risk assessment, greenhouse gas emissions measurement and disclosure. Through transparent reporting and continuous improvement, we aim to enhance our understanding of climate-related risks while supporting the long-term resilience of our portfolio.

Together, these reports provide an overview of our approach, our progress and the initiatives underway across our portfolio as we continue to strengthen our responsible investment practices.

Read more about our approach to responsible investing.

The post CC&L Infrastructure Releases 2025 Responsible Investment and Climate Reports appeared first on Groupe financier Connor, Clark & Lunn ltée.

This is the second in a two-part series on small caps. Last week, we looked at historical small caps performance, recent small caps performance and the reasons behind the unexpected. This week, we dive into what this means for allocators and skeptics.

Small caps have captured the attention of allocators, what with their outperformance of large caps, their durability through economic surprises and the access they offer outside of the crowded top ten mega caps. How does this information impact portfolio allocations?

Implementation: where the allocator’s choices can make a difference

The case for small caps is strongest when implementation is treated as part of the allocation decision. In a broad and inefficient universe, choosing active over passive, quality over the index, and a global opportunity set can make a meaningful difference. What needs to be considered when it comes to portfolio allocation?

Active over passive

We’ve previously discussed eVestment peer universe data showing the median active manager added value in Global and EAFE small cap. As of May 31, 2026, according to eVestment peer universe data the median EAFE small-cap manager has delivered 1.75% higher returns than the  MSCI EAFE Small Cap index, since the inception of our respective strategies.

BofA Global Research notes that small-cap active managers have posted better hit rates than large-cap active managers in seven of the last 11 years through 2025. The opportunity set supports it: BofA shows the long-run annualized Quintile 1 versus Quintile 5 spread for the FCF/EV factor within the Russell 2000 is approximately 20 percentage points, versus 7 within the Russell 1000.

Quality over the index

As we argued in our December 2025 commentary, “Time to take out the trash – Why high ROE matters in the long run,” the global small-cap universe contains over 12,000 names and the dispersion between the best and worst businesses is enormous.

Global breadth, with a regional lens

EAFE small caps are, in our view, the strongest within-asset-class call today. The European valuation gap to long-term averages is wide, the regional economies are at different points in their cycles, and the structural themes – German fiscal deployment, European industrial policy, Japanese reform – sit disproportionately in this universe.

Four objections to small caps, and what the evidence actually shows

If the historical evidence supports investing in small caps, and allocators have the opportunity to actively make a difference within portfolios, why aren’t small caps more heavily weighted? The four objections below come up most often in our conversations with allocators.

“Small caps are too volatile in this environment.”

But BofA Global Research’s May 2026 data documents that the realized volatility of the Russell 2000 has been lower than the S&P 500 during this decade’s worst weeks – a reversal of the prior pattern. The same has held year to date through the Iran war, and through several recent stress episodes (Brexit 2016, Taper Tantrum 2013, COVID 2020, tariffs 2025).

Reality is the dispersion in S&P 500 names has compressed as concentration has risen, while small-cap volatility no longer carries the size premium it once did. Volatility is no longer the reason to avoid the asset class.

“The small-cap index has become a junk bucket of non-earners and unprofitable biotechs.”

This was true through 2022. It is becoming less true. The median ROE of the Russell 2000 has been rising off multi-decade lows, the share of non-earners has begun to decline, the Russell 2000 saw more upgrades to the Russell 1000 than downgrades in the 2023 and 2024 rebalances and the share of US IPOs with negative earnings has fallen from roughly 80% during the 2020–22 bubble to approximately 60% year to date.

The S&P 600, which applies a profitability screen, currently has only about 10% non-earners against approximately 32% in the Russell 2000 – a structural choice available to any allocator concerned about index composition. As we argued before, high-ROE small caps have, over multi-year horizons, materially outperformed their lower-quality peers; quality selection is the answer to this objection, not avoidance of the asset class.

“Active managers can’t beat the small-cap index – look at 2025.”

2025 was the worst year on record for active small cap managers, with roughly 15% beating the Russell 2000 (BofA). It was also one of the most extreme low-quality rallies of the past decade. Active small cap managers tend to be structurally tilted toward quality, which is precisely the wrong tilt during a junk-led move. The longer-run picture is different. As above, active small cap managers have posted better hit rates than active large cap managers in seven of the last 11 years. The 2025 episode is best understood as an extreme drawdown in a strategy that has otherwise compounded reliably, not as evidence that the asset class is too efficient for active management.

“We should wait for rate cuts before adding small caps.”

Two pieces of evidence cut against this. First, per Kepler Cheuvreux, the historical correlation between European small-cap relative performance and the German Bund yield has materially weakened since early 2025. The asset class has been outperforming through rising rates, not waiting for them to fall. Second, per BofA, what matters more for small-cap performance than rates per se is the corporate profits cycle: in periods of accelerating EPS growth, US small caps have averaged 18–19% annual returns regardless of whether GDP was accelerating or decelerating, with the highest average and best hit rate in accelerating EPS combined with decelerating GDP.

The current Russell 2000 forward P/E of approximately 16.9x implies roughly 8% annualized 10-year returns based on the historical regression (BofA, R-squared 0.46). The setup does not require a particular rate path to work.

The case against small caps often rests on backward-looking assumptions: higher volatility, weaker quality, poor active outcomes and rate dependence. But recent evidence is showing us that those assumptions need to be revisited.

Sizing: the wrong question, asked the right way

Clients regularly ask how much small cap is the right amount. In our September 2025 article, “Why small caps are built for what’s next,”* we shared that our typical recommendation falls between 5% and 15%, and the precise figure matters less than the choice to size the allocation meaningfully in the first place. A four-asset mean-variance optimization on EAFE and US large and small caps – using eVestment median manager returns from January 1999 to June 2025 – produces an efficient frontier on which an all-large-cap portfolio does not sit. The closest efficient point combines roughly 30% small caps with 70% US large caps at the same volatility level, with higher expected returns. The number will vary with assumptions; the qualitative conclusion does not.

The harder question for most allocators is not 5% versus 15%. It is whether the strategic underweight that has accumulated over a decade of large-cap dominance gets revisited at all. The structural arguments stand on their own.

The recent evidence – small-cap outperformance through a genuinely difficult macro backdrop, broad-based across sectors, decoupled from bond yields, supported by a valuation gap that has if anything widened, and an index whose quality composition is improving from its 2022 lows – reinforces the timing. The objections can keep coming, but we can see through them with evidence-backed rebuttals. Allocators can make a clear difference. We think the case for revisiting the underweight is as clear as it has been in years.

Global Alpha was founded on the conviction that small caps are an inefficient asset class in which an experienced team can generate alpha across a full cycle. We are happy to discuss how a small-cap allocation can be sized within a particular plan’s constraints, and how our Global and International Small Cap strategies have navigated the recent environment.

* Contact us for a copy of this article.

The post Fixing the strategic small cap underweight: Part 2 appeared first on Groupe financier Connor, Clark & Lunn ltée.

This is the second in a two-part series on small caps. Last week, we looked at historical small caps performance, recent small caps performance and the reasons behind the unexpected. This week, we dive into what this means for allocators and skeptics.

Small caps have captured the attention of allocators, what with their outperformance of large caps, their durability through economic surprises and the access they offer outside of the crowded top ten mega caps. How does this information impact portfolio allocations?

Implementation: where the allocator’s choices can make a difference

The case for small caps is strongest when implementation is treated as part of the allocation decision. In a broad and inefficient universe, choosing active over passive, quality over the index, and a global opportunity set can make a meaningful difference. What needs to be considered when it comes to portfolio allocation?

Active over passive

We’ve previously discussed eVestment peer universe data showing the median active manager added value in Global and EAFE small cap. As of May 31, 2026, according to eVestment peer universe data the median EAFE small-cap manager has delivered 1.75% higher returns than the  MSCI EAFE Small Cap index, since the inception of our respective strategies.

BofA Global Research notes that small-cap active managers have posted better hit rates than large-cap active managers in seven of the last 11 years through 2025. The opportunity set supports it: BofA shows the long-run annualized Quintile 1 versus Quintile 5 spread for the FCF/EV factor within the Russell 2000 is approximately 20 percentage points, versus 7 within the Russell 1000.

Quality over the index

As we argued in our December 2025 commentary, “Time to take out the trash – Why high ROE matters in the long run,” the global small-cap universe contains over 12,000 names and the dispersion between the best and worst businesses is enormous.

Global breadth, with a regional lens

EAFE small caps are, in our view, the strongest within-asset-class call today. The European valuation gap to long-term averages is wide, the regional economies are at different points in their cycles, and the structural themes – German fiscal deployment, European industrial policy, Japanese reform – sit disproportionately in this universe.

Four objections to small caps, and what the evidence actually shows

If the historical evidence supports investing in small caps, and allocators have the opportunity to actively make a difference within portfolios, why aren’t small caps more heavily weighted? The four objections below come up most often in our conversations with allocators.

“Small caps are too volatile in this environment.”

But BofA Global Research’s May 2026 data documents that the realized volatility of the Russell 2000 has been lower than the S&P 500 during this decade’s worst weeks – a reversal of the prior pattern. The same has held year to date through the Iran war, and through several recent stress episodes (Brexit 2016, Taper Tantrum 2013, COVID 2020, tariffs 2025).

Reality is the dispersion in S&P 500 names has compressed as concentration has risen, while small-cap volatility no longer carries the size premium it once did. Volatility is no longer the reason to avoid the asset class.

“The small-cap index has become a junk bucket of non-earners and unprofitable biotechs.”

This was true through 2022. It is becoming less true. The median ROE of the Russell 2000 has been rising off multi-decade lows, the share of non-earners has begun to decline, the Russell 2000 saw more upgrades to the Russell 1000 than downgrades in the 2023 and 2024 rebalances and the share of US IPOs with negative earnings has fallen from roughly 80% during the 2020–22 bubble to approximately 60% year to date.

The S&P 600, which applies a profitability screen, currently has only about 10% non-earners against approximately 32% in the Russell 2000 – a structural choice available to any allocator concerned about index composition. As we argued before, high-ROE small caps have, over multi-year horizons, materially outperformed their lower-quality peers; quality selection is the answer to this objection, not avoidance of the asset class.

“Active managers can’t beat the small-cap index – look at 2025.”

2025 was the worst year on record for active small cap managers, with roughly 15% beating the Russell 2000 (BofA). It was also one of the most extreme low-quality rallies of the past decade. Active small cap managers tend to be structurally tilted toward quality, which is precisely the wrong tilt during a junk-led move. The longer-run picture is different. As above, active small cap managers have posted better hit rates than active large cap managers in seven of the last 11 years. The 2025 episode is best understood as an extreme drawdown in a strategy that has otherwise compounded reliably, not as evidence that the asset class is too efficient for active management.

“We should wait for rate cuts before adding small caps.”

Two pieces of evidence cut against this. First, per Kepler Cheuvreux, the historical correlation between European small-cap relative performance and the German Bund yield has materially weakened since early 2025. The asset class has been outperforming through rising rates, not waiting for them to fall. Second, per BofA, what matters more for small-cap performance than rates per se is the corporate profits cycle: in periods of accelerating EPS growth, US small caps have averaged 18–19% annual returns regardless of whether GDP was accelerating or decelerating, with the highest average and best hit rate in accelerating EPS combined with decelerating GDP.

The current Russell 2000 forward P/E of approximately 16.9x implies roughly 8% annualized 10-year returns based on the historical regression (BofA, R-squared 0.46). The setup does not require a particular rate path to work.

The case against small caps often rests on backward-looking assumptions: higher volatility, weaker quality, poor active outcomes and rate dependence. But recent evidence is showing us that those assumptions need to be revisited.

Sizing: the wrong question, asked the right way

Clients regularly ask how much small cap is the right amount. In our September 2025 article, “Why small caps are built for what’s next,”* we shared that our typical recommendation falls between 5% and 15%, and the precise figure matters less than the choice to size the allocation meaningfully in the first place. A four-asset mean-variance optimization on EAFE and US large and small caps – using eVestment median manager returns from January 1999 to June 2025 – produces an efficient frontier on which an all-large-cap portfolio does not sit. The closest efficient point combines roughly 30% small caps with 70% US large caps at the same volatility level, with higher expected returns. The number will vary with assumptions; the qualitative conclusion does not.

The harder question for most allocators is not 5% versus 15%. It is whether the strategic underweight that has accumulated over a decade of large-cap dominance gets revisited at all. The structural arguments stand on their own.

The recent evidence – small-cap outperformance through a genuinely difficult macro backdrop, broad-based across sectors, decoupled from bond yields, supported by a valuation gap that has if anything widened, and an index whose quality composition is improving from its 2022 lows – reinforces the timing. The objections can keep coming, but we can see through them with evidence-backed rebuttals. Allocators can make a clear difference. We think the case for revisiting the underweight is as clear as it has been in years.

Global Alpha was founded on the conviction that small caps are an inefficient asset class in which an experienced team can generate alpha across a full cycle. We are happy to discuss how a small-cap allocation can be sized within a particular plan’s constraints, and how our Global and International Small Cap strategies have navigated the recent environment.

* Contact us for a copy of this article.

The post Fixing the strategic small cap underweight: Part 2 appeared first on Groupe financier Connor, Clark & Lunn ltée.

Chart 1

The stall could be explained by a less favourable “excess” money backdrop. Six-month growth of global (i.e. G7 plus E7) real money – on both narrow and broad definitions – crossed below that of industrial output in April. Narrow money growth was higher over August-March, while the broad money gap had been positive in most months since end-2022 – chart 2.

Chart 2

Real money growth rates appear to have recovered in May but may not have moved back above output expansion, based on partial information.

Prospects for a restoration of excess money support are mixed.

The real money slowdown reflected an energy-driven rise in six-month CPI momentum. This should reverse if recent commodity price relief is sustained – chart 3.

Chart 3

Yield curves, however, remain higher than before Gulf conflict, reflecting tighter actual and expected monetary policies. Higher rates could dampen nominal money growth.

Meanwhile, solid June flash PMI results suggest that six-month industrial output expansion will hold up near term.

As previously discussed, global money growth has been supported recently by faster US expansion. Six-month growth of the preferred US narrow and broad measures here – M1A and M2+ respectively – rose further to 9.3% and 8.2% annualised respectively in May – chart 4. (The M1A series has been adjusted for a reclassification of some savings deposits as demand deposits in November.)

Chart 4

By contrast, six-month growth of Eurozone and UK broad money – as measured by non-financial M3 / M4 – was just 3.7% and 3.4% annualised respectively in April. May numbers are released next week.

The break-out of US six-month money growth above a January 2025 high coincided with a resumption of Fed balance sheet expansion. Chair Warsh wants to reverse this policy, suggesting a future downside risk to money trends.

The post Are equities stalling? appeared first on Groupe financier Connor, Clark & Lunn ltée.

Chart 1

The stall could be explained by a less favourable “excess” money backdrop. Six-month growth of global (i.e. G7 plus E7) real money – on both narrow and broad definitions – crossed below that of industrial output in April. Narrow money growth was higher over August-March, while the broad money gap had been positive in most months since end-2022 – chart 2.

Chart 2

Real money growth rates appear to have recovered in May but may not have moved back above output expansion, based on partial information.

Prospects for a restoration of excess money support are mixed.

The real money slowdown reflected an energy-driven rise in six-month CPI momentum. This should reverse if recent commodity price relief is sustained – chart 3.

Chart 3

Yield curves, however, remain higher than before Gulf conflict, reflecting tighter actual and expected monetary policies. Higher rates could dampen nominal money growth.

Meanwhile, solid June flash PMI results suggest that six-month industrial output expansion will hold up near term.

As previously discussed, global money growth has been supported recently by faster US expansion. Six-month growth of the preferred US narrow and broad measures here – M1A and M2+ respectively – rose further to 9.3% and 8.2% annualised respectively in May – chart 4. (The M1A series has been adjusted for a reclassification of some savings deposits as demand deposits in November.)

Chart 4

By contrast, six-month growth of Eurozone and UK broad money – as measured by non-financial M3 / M4 – was just 3.7% and 3.4% annualised respectively in April. May numbers are released next week.

The break-out of US six-month money growth above a January 2025 high coincided with a resumption of Fed balance sheet expansion. Chair Warsh wants to reverse this policy, suggesting a future downside risk to money trends.

The post Are equities stalling? appeared first on Groupe financier Connor, Clark & Lunn ltée.

This is a two-part series on small caps. This week, we look at historical small caps performance, recent small caps performance and the reasons behind the unexpected. Next week, we’ll dive into what this means for allocators and skeptics.

The case for a meaningful small-cap allocation in institutional portfolios

Small caps have just done something the textbook says they should not have. Since the Middle East conflict began at the end of February 2026, small caps have outperformed large caps on both sides of the Atlantic – through an oil-price spike, a sharp re-pricing of European front-end rates and deeply negative eurozone economic surprises. Inside those headline numbers, that is not the behaviour of an asset class to be avoided.

Source: Bloomberg

Small caps have outperformed large caps on both sides of the Atlantic for the last two years.

Source: Bloomberg

Crowded at the top, despite a universe of options

MSCI’s classification methodology defines small caps as roughly the bottom 14% of free-float market capitalization in each country it covers. This creates a universe that spans over 12,000 listed companies and the institutional allocation to that universe has, if anything, contracted. Even within the S&P 500, long-only funds remain overweight the largest quintile by market cap and underweight the smallest. The result is a public-equity allocation that, for all its sophistication, is structurally tethered to the same fifty or so mega-caps that everyone else owns.

As we observed in our September 2025 article, “Why small caps are built for what’s next,”* three of the four episodes of extreme S&P 500 top-ten concentration over the past century – the Go-Go conglomerate years, the Nifty Fifty, and the dot-com boom – were each followed by extended periods of small-cap leadership. Top-ten concentration at the dot-com peak reached 37.0%; today it stands at roughly 40%. The fourth episode, today’s AI-and-Mag-7 configuration, has not yet resolved. An allocator who treats the current setup as permanent is implicitly betting that this time is different, despite repeated historical evidence.
 

Why small caps matter through the cycle, not just at the turn

Small caps earn a place in the policy mix on three grounds independent of timing the next rotation.

1. Breadth of opportunity.
   The small-cap universe is where most listed companies actually live, offering diversified factor and theme exposure that a mega-cap-dominated large-cap book does not provide. Further, the sector composition is materially different from large caps; US small caps carry more industrials, financials and real estate than US large caps, against an underweight in technology.
2. Direct, undiluted exposure to the themes that matter.
   Reshoring, European fiscal expansion, defence, grid and AI-infrastructure build-out and Japanese corporate reform all get expressed more purely through small caps than through the large-cap index, because the pure-play, picks-and-shovels companies in these themes are typically not listed at large-cap market capitalizations.
3. Differentiated economic exposure.
   According to research by Kepler Cheuvreux, European small caps generate roughly 60% of revenues from within Europe, versus roughly 33% for the blue-chip 50. This domestic tilt has become a feature rather than a bug in a world of recurring trade frictions, and the pattern broadly extends across EAFE.Bloomberg data indicate that Japanese small caps generate roughly 65–75% of their revenues domestically, compared with about 45% for TOPIX large caps. That domestic exposure leaves them well positioned to benefit from the emerging global order.

Unexpected outperformance: How are small caps doing it?

The cyclical setup we identified previously – technological disruption, top-of-market concentration, valuations well above long-run averages – remains in place. The conditions since end-February 2026 have been textbook unfavourable for small caps. Per Kepler, European front-end rate expectations re-priced sharply higher, eurozone economic surprises turned deeply negative, and oil spiked before partially retracing. Kepler’s analysis of monthly relative returns since 1994 shows European small caps have, on average, underperformed large caps by roughly -0.29% per month in OECD-defined “downturn” phases and -0.43% per month in “slowdown” phases. That headwind has not materialized.

And yet, small caps are outperforming large caps. Two features of the outperformance are worth flagging:

1. Outperformance has been broad-based across sectors rather than carried by a narrow theme: Kepler’s sector-level data since February 27, 2026 shows positive median small-cap performance against negative median large-cap performance, with European small caps outperforming large caps in nearly every sector.
2. Small caps’ historical sensitivity to bond yields has visibly weakened – per Kepler, the relative performance of European small caps versus large caps has materially decoupled from the German Bund yield since early 2025, breaking a relationship that had held for most of the post-2021 period.

The asset class is no longer waiting for rate cuts.

The valuation picture is the cleanest piece of the case. On Kepler’s data, European large caps trade at roughly 15.2x forward earnings against a long-term average since 2009 of 13.2x. European small caps trade at 14.4x against an average of 14.8x. The US picture is similar: BofA Global Research reports the relative forward P/E of the Russell 2000 versus the Russell 1000 is approximately 0.82x, and historically the relative forward P/E explains roughly 46% of the variability in subsequent 10-year relative returns.
 

Next week: turning the case into allocation

Small cap performance has been unexpected, but not entirely surprising. As investment managers specializing small caps, we know what small caps are capable of. Now that this market segment is regaining the attention of investors, what does this information mean for portfolio allocations? How can allocators adjust their underweight? We’ll discuss those details in next week’s commentary.

Global Alpha was founded on the conviction that small caps are an inefficient asset class in which an experienced team can generate alpha across a full cycle. We are happy to discuss how a small-cap allocation can be sized within a particular plan’s constraints, and how our Global and International Small Cap strategies have navigated the recent environment.

* Contact us for a copy of this article.

The post Fixing the strategic underweight: Part 1 <br><h2>Think big. Buy small caps</h2> appeared first on Groupe financier Connor, Clark & Lunn ltée.

This is a two-part series on small caps. This week, we look at historical small caps performance, recent small caps performance and the reasons behind the unexpected. Next week, we’ll dive into what this means for allocators and skeptics.

The case for a meaningful small-cap allocation in institutional portfolios

Small caps have just done something the textbook says they should not have. Since the Middle East conflict began at the end of February 2026, small caps have outperformed large caps on both sides of the Atlantic – through an oil-price spike, a sharp re-pricing of European front-end rates and deeply negative eurozone economic surprises. Inside those headline numbers, that is not the behaviour of an asset class to be avoided.

Source: Bloomberg

Small caps have outperformed large caps on both sides of the Atlantic for the last two years.

Source: Bloomberg

Crowded at the top, despite a universe of options

MSCI’s classification methodology defines small caps as roughly the bottom 14% of free-float market capitalization in each country it covers. This creates a universe that spans over 12,000 listed companies and the institutional allocation to that universe has, if anything, contracted. Even within the S&P 500, long-only funds remain overweight the largest quintile by market cap and underweight the smallest. The result is a public-equity allocation that, for all its sophistication, is structurally tethered to the same fifty or so mega-caps that everyone else owns.

As we observed in our September 2025 article, “Why small caps are built for what’s next,”* three of the four episodes of extreme S&P 500 top-ten concentration over the past century – the Go-Go conglomerate years, the Nifty Fifty, and the dot-com boom – were each followed by extended periods of small-cap leadership. Top-ten concentration at the dot-com peak reached 37.0%; today it stands at roughly 40%. The fourth episode, today’s AI-and-Mag-7 configuration, has not yet resolved. An allocator who treats the current setup as permanent is implicitly betting that this time is different, despite repeated historical evidence.
 

Why small caps matter through the cycle, not just at the turn

Small caps earn a place in the policy mix on three grounds independent of timing the next rotation.

1. Breadth of opportunity.
   The small-cap universe is where most listed companies actually live, offering diversified factor and theme exposure that a mega-cap-dominated large-cap book does not provide. Further, the sector composition is materially different from large caps; US small caps carry more industrials, financials and real estate than US large caps, against an underweight in technology.
2. Direct, undiluted exposure to the themes that matter.
   Reshoring, European fiscal expansion, defence, grid and AI-infrastructure build-out and Japanese corporate reform all get expressed more purely through small caps than through the large-cap index, because the pure-play, picks-and-shovels companies in these themes are typically not listed at large-cap market capitalizations.
3. Differentiated economic exposure.
   According to research by Kepler Cheuvreux, European small caps generate roughly 60% of revenues from within Europe, versus roughly 33% for the blue-chip 50. This domestic tilt has become a feature rather than a bug in a world of recurring trade frictions, and the pattern broadly extends across EAFE.Bloomberg data indicate that Japanese small caps generate roughly 65–75% of their revenues domestically, compared with about 45% for TOPIX large caps. That domestic exposure leaves them well positioned to benefit from the emerging global order.

Unexpected outperformance: How are small caps doing it?

The cyclical setup we identified previously – technological disruption, top-of-market concentration, valuations well above long-run averages – remains in place. The conditions since end-February 2026 have been textbook unfavourable for small caps. Per Kepler, European front-end rate expectations re-priced sharply higher, eurozone economic surprises turned deeply negative, and oil spiked before partially retracing. Kepler’s analysis of monthly relative returns since 1994 shows European small caps have, on average, underperformed large caps by roughly -0.29% per month in OECD-defined “downturn” phases and -0.43% per month in “slowdown” phases. That headwind has not materialized.

And yet, small caps are outperforming large caps. Two features of the outperformance are worth flagging:

1. Outperformance has been broad-based across sectors rather than carried by a narrow theme: Kepler’s sector-level data since February 27, 2026 shows positive median small-cap performance against negative median large-cap performance, with European small caps outperforming large caps in nearly every sector.
2. Small caps’ historical sensitivity to bond yields has visibly weakened – per Kepler, the relative performance of European small caps versus large caps has materially decoupled from the German Bund yield since early 2025, breaking a relationship that had held for most of the post-2021 period.

The asset class is no longer waiting for rate cuts.

The valuation picture is the cleanest piece of the case. On Kepler’s data, European large caps trade at roughly 15.2x forward earnings against a long-term average since 2009 of 13.2x. European small caps trade at 14.4x against an average of 14.8x. The US picture is similar: BofA Global Research reports the relative forward P/E of the Russell 2000 versus the Russell 1000 is approximately 0.82x, and historically the relative forward P/E explains roughly 46% of the variability in subsequent 10-year relative returns.
 

Next week: turning the case into allocation

Small cap performance has been unexpected, but not entirely surprising. As investment managers specializing small caps, we know what small caps are capable of. Now that this market segment is regaining the attention of investors, what does this information mean for portfolio allocations? How can allocators adjust their underweight? We’ll discuss those details in next week’s commentary.

Global Alpha was founded on the conviction that small caps are an inefficient asset class in which an experienced team can generate alpha across a full cycle. We are happy to discuss how a small-cap allocation can be sized within a particular plan’s constraints, and how our Global and International Small Cap strategies have navigated the recent environment.

* Contact us for a copy of this article.

The post Fixing the strategic underweight: Part 1 appeared first on Groupe financier Connor, Clark & Lunn ltée.