Welcome to RBC’s Markets in Motion podcast, recorded February 16th, 2026. I’m Lori Calvasina, head of US equity strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.

The big things you need to know: First, we review our stance on Small Caps. We had a little more love for them coming into Valentine’s Day weekend due to better fundamentals, but still see challenges that raise the bar for further outperformance.

Second, other things that jump out include more evidence of a tough reporting season, the slide in sentiment on the AAII survey, and thoughts on why we’re not intrigued with the Tech sector yet from a generalist perspective.

If you’d like to hear more, here’s another five minutes. Before we jump in, one programming note – the podcast will be off next week and resume later this month.

Starting with Takeaway #1: A Little More Love for Small Caps

Before the holiday weekend in the US, the Russell 2000 ended another choppy week on a positive note but took some hits, particularly after the jobs report dampened investor hopes for Fed cuts. We spent a decent chunk of our time with clients and internal partners last week discussing the state of Small Caps, and thought it was a good time to review what we see for this corner of the equity market at the moment.

There are a lot of good things we see going on within the space and for the space right now. In addition to maintaining its admittedly choppy outperformance trends relative to the S&P 500, we’ve also found that the Russell 2000 is outperforming private equity (as defined by an index of public equities that are involved in the private equity space).

Additionally, we’ve started to see more of a high-EPS-quality tilt to performance within the Russell 2000, a welcome development for active managers.

Earnings season has also been trending better for Small Caps than Large Caps in terms of EPS and revenue beat rates (the trends have slipped for the S&P 500 while improving for the Russell 2000)…

…as well as the rate of EPS estimate upward revisions (this stat is slightly higher for Russell 2000 than S&P 500).

Bottom-up consensus net income growth forecasts are also still pointing to stronger future growth in the Russell 2000 than the S&P 500, the Mag 7, or the index ex the Mag 7.

Economic fundamentals also argue in favor of Small Caps, with improving US GDP forecasts, a recent uptick in ISM manufacturing, and the latest NFP report which pointed to weaker-than-previously understood conditions in 2025 but improvement in early 2026.

Flows are also improving for Small Cap equity funds, both active and passive.

And while Small Caps have often been treated as a “buy the USA trade,” we think US Large Caps, and mega cap growth in particular, have been in greater focus by non-US investors in recent years due to the AI theme so are more likely to find themselves at the epicenter of geographical rotation.

For all of these reasons, we came into Valentine’s Day weekend with a little more love for Small Caps.

We do think it’s important to understand, however, that while the fundamental backdrop for this corner of the US equity market has improved from a few different vantage points, there are still some challenges in place for Small Caps that could keep the relative trade choppy. Importantly, this area of the market no longer looks deeply out of favor from either a positioning or valuation perspective, suggesting the bar for further outperformance has gotten higher and very dependent on the improved fundamentals staying intact.

Per data from CFTC, total buyside notional exposure has returned to slight net long territory and is right around levels that marked the peak in late 2020/early 2021 and early 2024 (though there is considerable room to travel to get back to the more extreme highs that have often been achieved).

Additionally, valuations are no longer sitting right in line with their November-2024 peaks the way they were a few weeks ago, but have gotten close to those levels once again.

We think this is why Small Caps were vulnerable to a bout of underperformance this past week when Fed cut concerns resurfaced. It’s been frustrating to us that this part of the market still seems to be getting moved around by Fed views at a time when fundamentals are headed in a better direction. In the end, while deserving of more affection, Small Caps are still simply not a trade for the faint of heart.

Wrapping up with What Else Jumps Out

• First, more evidence of a tough reporting season for the S&P 500. Most sectors and the Mag 7 have seen a downshift in 2026 EPS growth rate expectations since the start of the year. This has also been the case for most industries. Along with EPS and revenue beat rates that are a little below the last reporting season for the S&P 500, and earnings sentiment (the rate of upward EPS estimate revisions) that’s tracking below the highs of last September for the S&P 500, its top market cap names, and the rest of the index, this data suggests to us that reporting season has contributed to the choppy tape.

• Second, sentiment slides but likely has more room to go. The AI jitters that have shaken the stock market over the past few weeks have taken a toll on investor sentiment. Net bulls on the AAII survey fell to 0.4% in the latest update, taking the four-week average down to 8.8%. This was a significant move lower on this survey for the weekly data point, but it’s important to note that sentiment does not look deeply bearish yet. If recent angst in the equity market persists and a garden variety/ tier 1 drawdown in the S&P 500 of 5-10% occurs, we’ll be keeping an eye on this indicator for signs of extreme pessimism, as we think that what we’re going through in the stock market at the moment is a type of sentiment unwind. Late last November, a brief move to one standard deviation below the long-term average helped confirm a bottom in the S&P 500 after its painful 5.1% drawdown, whose ingredients as we discussed last week bear some resemblance to what we’re seeing in our indicators today.

• And finally, why we’re not intrigued with Tech yet from a generalist perspective. Given the damage to the Tech sector in recent weeks, we’re keeping a close eye on what our quant models are signaling for the sector as well as the industries within it. Note that these are models that we use to compare sectors and industries to one another, and that we acknowledge that specialists in the sector look at different things.

• At the broader sector level, our work indicates that S&P 500 Tech has turned neutral/slightly attractive on our valuation model (which uses median forward P/E), though the Russell 2000 version of the sector still looks expensive.

• Meanwhile, the rate of upward EPS estimate revisions remains high for the S&P 500 Tech sector, though levels have drifted down to slightly below peak.

• Digging down deeper, it remains a tale of two sectors in some regards. Looking across the Russell 3000, Software now looks attractively valued, but Semis & Semi Equipment still look expensive.

• Zooming out and taking a closer look at industry trends over time, it’s worth noting that the rate of upward EPS estimate revisions remains high but close to past peaks for Semis (a sign of froth but one that can likely endure for a while), while Software EPS revisions have been moving lower but haven’t yet returned to typical troughs.

• Similarly, Software P/Es have fallen sharply, but are still above their GFC and 1990-1991 recession lows. We also looked at Software’s P/E relative to Semis, and found that the relative ratio hasn’t reached historical lows quite yet either.

• In the end, we still see signs of froth on Semis, and a lack of evidence of capitulation on Software. We’ve been market weight the Tech sector, and maintain that view today.

That’s all for now. thanks for listening. And be sure to reach out to your RBC representative with any questions.