Summary

• Small-cap stocks have outperformed large caps recently, rising 43% versus 30% for the S&P 500 since late May.
• AI is a multi-faceted opportunity for small caps, especially in 'picks and shovels' plays like semiconductors and data center enablers, though valuations are elevated.
• Small-cap healthcare and biotech offer attractive, underappreciated growth, with many companies trading at reasonable valuations amid AI-driven market excitement.
• Key investment criteria include strong management, balance sheet strength, pricing power, and broad portfolio diversification to navigate sector uncertainty and inflation risks.

It’s not just the trillion-dollar titans that are benefitting from the boom in AI development, with some small-cap stocks also providing a “picks and shovels” opportunity according to Michele Ward, Portfolio Specialist with T. Rowe Price Investment Management.