The New Bull Case: Small-Caps & Deregulation

With President Trump’s abrupt about-face on tariff policy in China, it looks like both consumers and investors can breathe a sigh of relief. The idea of 145% tariffs on one of the world’s largest trade partners was always going to be unsustainable without sending the U.S. economy into a severe nosedive. The temporary suspension of reciprocal tariffs was the right one for the sake of the global economy and could serve as a catalyst for a reversal in some of the market trends since Liberation Day.

One of those trends has been small-cap underperformance.

The reason why small-caps have lagged over the past two months is pretty straightforward. These companies are likely to be more negatively impacted by tariffs because of their lesser ability to shift supply chains quickly and the comparative lack of financial resources to be able to handle higher costs. Large companies tend to have much more flexibility in handling these kinds of disruptions.

That narrative has played out in small-cap vs. large-cap performance.

Small-caps have lagged large-caps pretty consistently throughout 2025. More importantly, they have to stage any kind of bounceback now that the trade war has de-escalated.

That’s why the time for small-caps might be now. If the Liberation Day tariffs have been largely responsible for small-cap underperformance, wouldn’t it stand to reason that a reversal of those policies could inspire them to lead?

That could be the near-term catalyst for short-term small-cap outperformance, but the long-term catalyst is one that’s both long overdue and high on Trump’s agenda - deregulation.

The Case For Deregulation

Deregulation, of course, refers to the reduction or elimination of government rules and guidelines that typically end up constraining business operations. The energy and financial services industries are two examples of sectors where heavy regulation can cap corporate performance and investor returns.