In the dynamic landscape of financial markets, the anticipated resurgence of small-cap stocks appears to be overshadowed by the robust performance of large-cap equities. This shift is primarily fueled by continuous advancements in artificial intelligence (AI), which drives substantial earnings growth for major corporations. Despite prevailing concerns about an economic slowdown and elevated interest rates, large-cap firms demonstrate remarkable resilience. This trend suggests a prolonged period of outperformance for large-cap and growth-oriented exchange-traded funds (ETFs) heavily concentrated in prominent technology and AI-related companies.
AI Investments Propel Large-Cap Dominance Amid Economic Challenges
In a recent analysis, Citi reported a substantial 27% year-over-year earnings growth for S&P 500 companies during the first quarter, significantly surpassing earlier projections of 14%. This impressive growth is largely attributed to the robust performance of technology and AI-linked enterprises. Concurrently, projections for next-12-month earnings-per-share estimates for large-cap companies have surged by over 14% this year. Conversely, smaller companies face considerable challenges, including elevated borrowing costs, diminished pricing power, and margin pressures, which collectively hinder the widely anticipated small-cap recovery.
On May 29, 2026, Drew Pettit, director of U.S. equity strategy at Citi Research, articulated on BNN Bloomberg that AI infrastructure spending remains a pivotal driver of earnings growth, even as traditional cyclical sectors exhibit signs of weakening. Pettit highlighted that over half of the S&P 500's growth is attributable to AI, advising investors to maintain focus on secular growth sectors such as technology and AI. He anticipates that small-cap stocks will continue to underperform given the prevailing macroeconomic indicators. These insights emerge as investors recalibrate their expectations for Federal Reserve interest rate adjustments amidst persistent inflation and rising long-term Treasury yields, conditions that disproportionately affect smaller businesses reliant on affordable financing. Citi also suggests that significant AI-related capital expenditures are fostering a distinct growth paradigm for mega-cap technology firms, justifying their premium valuations as long as earnings momentum remains strong. Pettit remarked that high valuations can be sustained if growth materializes and earnings estimates are revised upwards.
This renewed emphasis on earnings durability and AI exposure is expected to bolster large-cap and growth-focused ETFs, such as the Invesco QQQ Trust and the SPDR S&P 500 ETF Trust. Funds like the Vanguard Mega Cap Growth ETF and the Roundhill Magnificent Seven ETF, with their substantial holdings in AI-linked market leaders, are also poised for continued investor interest. Meanwhile, small-cap ETFs, including the iShares Russell 2000 ETF, are likely to remain susceptible to fluctuations in interest rate expectations and broader economic growth concerns. Pettit advises investors to prioritize companies exhibiting strong pricing power, robust earnings momentum, and the capacity to expand margins despite a decelerating macroeconomic environment.
This economic narrative underscores a significant divergence in market performance, driven by the transformative power of AI. It highlights the strategic imperative for investors to align their portfolios with the prevailing trends of technological innovation and corporate resilience, rather than solely relying on traditional valuation models. The continuous evolution of AI is not merely a technological phenomenon but a profound economic force reshaping investment opportunities and market leadership.
