SMID Cap Growth – Q2 2026 Commentary

Small-cap equities staged a powerful recovery in the second quarter, more than reversing the first quarter’s conflict-driven weakness. Following the cease-fire that was announced after the market close on April 7, risk appetite returned in force and capital continued to concentrate in the AI build-out theme, where semiconductor, high-speed-connectivity, and data-center-infrastructure names posted extraordinary gains as hyperscaler and “neo cloud” capital-expenditure expectations keep ratcheting higher. A generally supportive macro backdrop — cooling inflation concerns and an equity market willing to pay up for secular growth — reinforced the move, and higher-beta, higher-multiple small caps were among the biggest beneficiaries. The Russell 2000® surged +21.5% in the quarter, resulting in a +22.6% first half; the index’s best start to a year since 1991. Growth led decisively, with the Russell 2000® Growth (R2G) Index up +25.7% versus +17.2% for the Russell 2000® Value. Importantly, small caps finally began to close the gap with large caps: the Russell 2000® outpaced the S&P 500® (+15.2%) by a wide margin in the quarter and has now outperformed large caps by roughly 1,875 bps since last July, arguably breaking the longest large-cap outperformance cycle in decades.

Beneath these strong headline numbers, market leadership was still relatively narrow with outperformance heavily concentrated in those technology & industrial companies that are benefitting from AI infrastructure spending. It was also considered “low-quality” by traditional metrics, with Beta the top performing factor and loss-making companies beating profitable ones by more than 1,200 bps. Notably, however, the best performing stocks in the Russell 2000® were also those in the top quintile of expected next-twelve-month (NTM) sales growth. Technology and industrial companies most levered to the resilient economy and the accelerating AI-related infrastructure spending have seen an extraordinary step function increase in demand and the market has strongly rewarded that acceleration.

Performance:

The KCM SMID Cap Growth (SMIDG) composite gained +36.73% (gross of fees) and +36.51% (net of fees) for the second quarter of 2026, outperforming the Russell 2500™ Growth (R2500G) Index, which increased +24.02%, by +1,271 bps (gross of fees) and +1,249 bps (net of fees). For the first half of 2026, the SMIDG composite increased +29.16% (gross of fees) and +28.74% (net of fees) versus the R2500G Index’s +19.66%, thereby outperforming by +950 bps (gross of fees) and +908 bps (net of fees). Additional performance is included in the table below.

Data as of 6/30/2026.

On a relative basis, Information Technology and Energy were the best performing sectors versus the benchmark in the quarter, with Information Technology accounting for the majority of our relative outperformance. The sector was led by a provider of integrated memory and Artificial Intelligence infrastructure solutions. The shares more than quadrupled after the company reported strong fiscal second-quarter results in early April and raised its full-year outlook for the Integrated Memory business, citing AI-driven demand and favorable pricing dynamics. Energy benefited from strong gains in our only holding, a provider of power generation and distribution solutions, primarily to large data center operators. The company has signed long-term leases to design, build and operate behind the meter power solutions for several large-scale AI developments. We bought our initial position earlier this year in anticipation of them expanding both their client roster and project scope, which we believe has the potential to support growth over the next several years as they solve a key bottleneck for the industry.

The largest detractors to relative performance for the quarter were Financials and Consumer Discretionary. Within Financials the largest individual detractor was a provider of digital investment advisory solutions. The company has struggled since its IPO due to greater fee rate pressure, as the market did not fully anticipate the level of incentives that would be needed to drive asset growth across the platform. While we still believe they are well positioned to gain market share in a growing demographic via expanded product offerings, we have moved to the sidelines until we have better visibility on the profitability of this growth in a competitive market. Consumer Discretionary weakness was led by an operator and franchisor of fitness centers, whose shares fell after the company cut its 2026 guidance — trimming its revenue and same-club-sales outlook following a below-plan gain in net new member additions that management attributed to a poor marketing plan that pivoted away from targeting first-time gym-goers and overly emphasized the ease of cancelling anytime. The concerns we flagged last quarter thus came to a head, albeit at a slightly worse magnitude. We continue to hold the shares as we believe the marketing issues are fixable and the valuation is highly attractive for a growing, high-return, franchise-focused business.

For the first half of the year, the strong relative performance was led by Information Technology and Industrials, a direct result of our intentional overweight of businesses benefiting from the AI infrastructure and onshoring build-out. Consumer Discretionary and Financials were the largest year-to-date detractors to relative performance.

Outlook:

After a historic first half, we are mindful that much of small caps’ multiple expansion “ammunition” has likely been spent: the Russell 2000 now trades at a modest premium to its own historical median, even if it remains attractively valued relative to large caps, whose concentration sits at historic extremes. Importantly, however, the fundamentals are improving to support this — small-cap earnings growth has inflected positively, forward estimates proved unusually resilient through the first quarter, and our work points to strong continued earnings gains into 2027. That should matter, because with valuations relatively full, we believe changes in individual company earnings expectations, rather than further multiple expansion, will drive the bulk of returns from here. We also recognize that this quarter’s leadership — narrow, high-beta, and lower-quality — is rarely durable, and we would expect the market to reward earnings quality and proof of durable growth as the cycle matures.

While these conditions inform our view of the overall environment, the core of our strategy remains focused on identifying individual companies that can benefit from durable trends, or from their own unique product opportunities, to gain share and expand their end markets with attractive economic returns. We continue to find compelling opportunities across the AI-infrastructure ecosystem as well as other high-quality growth businesses whose valuations have been overlooked in the market’s thematic driven advance. We use scenario analysis and continually adjust the portfolio to lean into the best risk/reward opportunities the market provides, and we will remain both nimble and disciplined as the disruptions and opportunities created by artificial intelligence continue to unfold.

Thank you for your continued confidence in the Kennedy Capital team. Should you have any additional questions, please do not hesitate to contact us.

Sincerely,

Jean Barnard, CFA^®

Portfolio Manager

Ryan Dunnegan, CPA & Alex Mosman, CFA^®

Assistant Portfolio Managers

Important Disclosures

Kennedy Capital Management LLC (“KCM”) is a Delaware limited liability company headquartered in Missouri. KCM is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Clients of the Firm include U.S. corporations, pension and profit sharing funds, colleges and universities, trusts, not-for-profit organizations, foundations, and individuals. KCM claims compliance with the Global Investment Performance Standards (GIPS^®). GIPS^® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. GIPS^® are a set of standardized, industry-wide ethical principles that provide investment firms with guidance on calculating and reporting their investment results to prospective clients to ensure fair representation and full disclosure of an investment firm’s performance history.

Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. A complete list of all securities recommended by KCM in the preceding year, a fully compliant GIPS Composite Report, and the list of composite descriptions are available upon request from KCM at 10829 Olive Blvd., Suite 100. St. Louis, MO, 63141.

The SMID Cap Growth Composite invests in growth securities of predominately small and mid cap companies that generally have a market capitalization that is reflective of the Russell 2500™ Growth Index. The Manager seeks companies with durable business models able to deploy assets into growing sets of opportunities providing superior rates of return. For comparison purposes the composite is measured against the Russell 2500™ Growth Index. The U.S. Dollar is the currency used to express performance.

Composite specific data provided within this presentation has been calculated from accounts that are discretionary as defined in this paragraph. The assets shown are derived only from discretionary accounts. Non-discretionary accounts, as defined by KCM, are accounts that are not included in the composite due to one or any combination of the following criteria: there were significant cash inflows or outflows within the account; the account’s asset level did not meet the minimum requirement to remain in the composite; the account assets are managed by others using our non-discretionary model. The temporary removal of such an account occurs at the beginning of the month and the account re-enters the composite the month after the criteria has been met.

Performance returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross of fee returns reflect the deduction of transaction costs and custodian fees but do not reflect the deduction of investment advisory fees. Net of fee performance is calculated using gross returns less the actual applicable annual management fee applied monthly. Past performance is not indicative of future results. A client’s return will be reduced by the advisory fees as described in Form ADV Part 2A and other expenses incurred by the account. For example, an annual advisory fee of 1% compounded quarterly over 10 years will reduce a gross 14.44% annual return to a net 13.32% annual return. Form ADV Part 2A is available upon request.

The performance figures reported herein are unaudited, may be based upon information obtained via electronic data sources (”feeds”) and may be subject to change. Data feeds from many of KCM clients’ selected custodians are obtained through third party sources, and are used to compare custodial data to KCM’s client account records as frequently as daily. Monthly, KCM reviews clients’ account holdings along with cash and share quantities against the custodial statements. In some instances, variances may exist between final audited custodial information and the information KCM obtains via such data feeds. Generally, any such variances are researched and reconciled within thirty days of the period end.

The information provided should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in a KCM portfolio at the time you receive this letter or that securities sold have not been repurchased. Allocations among industries, sectors and securities may vary and are subject to change without notice. Any securities discussed do not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the industry or sector allocation decisions mentioned, or securities transactions or holdings discussed were or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Sector Weightings are subject to change at any time.  Sectors are based on the Global Industry Classification Standard (“GICS”) classification scheme and are measured as a percentage of the total composite in terms of asset value as of the date indicated above.  Individual client portfolios may be different based on variations in security purchase price and date, and individual client restrictions.  Due to rounding, Sector Weighting’s total percentages may not equal 100%.

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Allocations to various assets classes change over time and deviate from any stated or targeted percentages of a total portfolio as a result of market conditions and reallocation decisions. Therefore, nothing herein reflects a static portfolio allocation that will remain the same or match stated target allocations of asset classes.

Russell Investment Group is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto.  The presentation may contain confidential information and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited.  This is a presentation of Kennedy Capital Management.  Russell Investment Group is not responsible for the formatting or configuration of this material or for any inaccuracy in Kennedy Capital Management’s presentation thereof.   

The Russell 2500™ Growth Index measures the performance of the small to mid-cap growth segment of the U.S. equity universe. It includes those Russell 2500™ companies with relatively higher price-to-book ratios, higher I/B/E/S forecast medium term (2 year) growth and higher sales per share historical growth (5 year). The Russell 2500™ Growth Index is constructed to provide a comprehensive and unbiased barometer of the small to mid-cap growth market. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small to mid-cap opportunity set and that the represented companies continue to reflect growth characteristics.

The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with relatively lower price-to-book ratios, lower I/B/E/S forecast medium term (2 year) growth and lower sales per share historical growth (5 year). The Russell 2000® Value Index is constructed to provide a comprehensive and unbiased barometer for the small-cap value segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 7% of the total market capitalization of that index, as of the most recent reconstitution. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000® is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

The Russell 2500™ Growth Index is used as the benchmark.  The Index is unmanaged and represents total returns including reinvestment of dividends.  The benchmark is used for comparative purposes only and generally reflects the comparable risk or investment style of the Firm’s strategy.  The investment portfolios underlying the Index are different from the investments in the portfolios managed by the Firm.  Certain accounts may also use other benchmarks not listed in the GIPS composite report. The Verification and Performance Examination Report does not cover the benchmark returns included in the GIPS composite report. Investors cannot invest directly in an index.

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.