Oct 7, 2026 · 1h 12m
Small caps seek a comeback as AI spending broadens
Tom Maher on Small-Cap Investing, AI Infrastructure and Opportunities Beyond Big Tech
After years of large-cap market concentration, improving earnings and AI infrastructure investment could reopen opportunities in smaller companies, but higher rates and weak businesses raise the bar for selection.
- 1Small- and mid-cap stocks may benefit as earnings improve and AI infrastructure spending reaches beyond dominant technology companies.
- 2Active management matters in a diverse universe where business quality, self-funding growth, management discipline, and valuation vary widely.
- 3Higher interest rates, passive flows, and shifting AI valuations can reshape portfolio construction even when research remains primarily bottom-up.
Don't miss
Monaghan’s most practical lesson is to take profits as an investment thesis plays out rather than let analysis become an excuse for inaction.
The brief
Tom Monaghan of Hilton Capital argues that years of large-cap dominance may be giving way to a broader opportunity set as smaller companies’ earnings improve and AI infrastructure spending expands.
The case for small caps is not simply a size premium: Monaghan emphasizes quality, self-funding growth, disciplined management, and valuation in a universe crowded with unprofitable businesses.
His process is primarily bottom-up, but inflation, interest rates, passive flows, and AI-driven valuation shifts still influence how he builds a portfolio.
Ideas come from thematic research and cross-sector comparisons, with expectations adjusted for a company’s growth stage and management’s ability to execute.
The closing lesson is disciplined rather than complicated: avoid excessive analysis, take profits as a thesis plays out, and remain selective when market conditions change.
What was said on this episode
33 statements · 22 positive · 6 negative · 5 neutral
AI infrastructure investment is a significant driver of GDP growth.
“the AI buildout, which we'll get into more detail, I'm sure, but that's a significant driver of GDP growth”
Listen at 2:47
Small- and mid-cap earnings are expected to grow 20–30% over the next few years.
“you have 20%, 30% kind of earnings growth expected over the next few years”
Listen at 3:08
Operational efficiency is boosting earnings through margin improvements.
“you are seeing some of that come through”
Listen at 7:57
Small-cap earnings growth has begun to improve relative to large caps.
“that seems to have reversed to some extent”
Listen at 9:22
Improving small-cap earnings should attract more investor interest.
“you should probably start to see a little more interest in the market space”
Listen at 9:36
U.S. small- and mid-cap stocks will capture reshoring and domestic development activity.
“all of that is going to be captured by small mid-cap stocks here in the United States”
Listen at 11:07
Investors should consider small- and mid-cap stocks for diversification and growth exposure.
“you should be thinking about small and mid-cap stock”
Listen at 12:18
The strategy’s investable range extends down into micro-cap stocks.
“the low end is really kind of down to, you name it, micro caps”
Listen at 14:13
Small-cap stocks can carry a valuation premium at the individual-stock level.
“I think that there is a premium”
Listen at 16:06
Only a small minority of small- and mid-cap companies graduate into larger-cap status.
“Very few of them actually graduate”
Listen at 16:30
Small-cap investors should actively manage sector exposures rather than track index weights.
“you need to be genuinely active”
Listen at 20:22
Small-cap managers should vary both stock selection and sector weights.
“you want a manager who's not only active in terms of the stock level decisions, but I think also the willingness to let those sector weights move”
Listen at 21:22
The portfolio expands its number of holdings during major market or macro changes.
“when things are sort of in a change point, you'll see that number expand”
Listen at 23:22
The portfolio concentrates into higher-conviction holdings during difficult conditions.
“when things are getting rough, our number of names actually shrinks”
Listen at 23:33
The quality of small-cap indexes has declined because more constituents are unprofitable.
“the overall aggregate quality is a little bit lower”
Listen at 24:31
Private-capital exits will eventually produce good mid-cap public companies.
“there will be some good companies coming out that way”
Listen at 28:54
Groundbreaking technology companies can be relatively insulated from macroeconomic conditions.
“the macro may have very little impact on that company's fortunes in the near term or even in the long term”
Listen at 31:17
Stock selection should incorporate both bottom-up analysis and macroeconomic conditions.
“you need to incorporate both”
Listen at 32:48
Higher interest rates increase the importance of balance-sheet and business quality.
“quality should start to matter more”
Listen at 36:47
Higher interest rates should theoretically reduce equity valuation multiples.
“multiple theoretically should come down”
Listen at 38:14
Small-cap stocks can massively outperform when ETF inflows target their thematic baskets.
“the small cap stock may massively outperform”
Listen at 42:15
Basket-driven selling can create opportunities in fundamentally sound small-cap stocks.
“you can find opportunities where a stock gets clobbered because it's in a basket that people are selling off”
Listen at 42:55
Small-cap investors should place greater emphasis on earnings growth than multiple expansion.
“you really have to sort of have more of an emphasis on that earnings growth”
Listen at 44:46
The market will eventually recognize companies delivering materially improved earnings growth.
“eventually I think market will come around to the attention on that company”
Listen at 46:55
Investors should be equally cautious about extremely cheap and expensive stocks.
“we're as wary of really cheap stocks as we are really expensive stocks”
Listen at 51:37
Consistent earnings growth can eventually lead to higher valuation multiples.
“the valuation may actually start to go up again”
Listen at 56:01
Management assessment is especially important when evaluating small-cap companies.
“assessing management is very important”
Listen at 57:07
Poor management decisions affect small enterprises quickly and dramatically.
“if you make bad moves, it can sort of manifest itself rather quickly and more dramatically”
Listen at 57:34
Manufacturing reshoring and a domestic industrial renaissance are occurring.
“I think they're happening”
Listen at 1:01:43
Globalization has partially unwound, increasing demand for local production capacity.
“you've had a little bit of an unwind of the globalization”
Listen at 1:04:10
Excessive company analysis can reduce investment decision quality.
“there is a diminishing return on knowing in some cases too much about a company”
Listen at 1:06:28
Investors should take partial profits as a stock appreciates.
“don't be afraid to book some of the profits on the way up”
Listen at 1:08:10
Unexpected stock reactions to news warrant deeper investigation.
“if a stock responds to a piece of news or a development, the reverse of what you expect, pay close attention”
Listen at 1:09:13
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.