With the Fed kicking off a new rate-cutting cycle, it’s easy to get overly bullish on the small- and mid-caps as well as some of the more speculative high-tech companies that offer less in the way of profits today for ambitious growth promises in the future. In any case, I do think that the small-cap universe is worth another look, especially for investors seeking growth at a reasonable price of admission.
Indeed, the large-cap stocks have gotten a little bit on the expensive side amid this seemingly unstoppable AI-led bull market. And while the small caps might be a tad too difficult to value or stomach for most retail investors, I do think that getting some exposure to them via an ETF product could make a lot of sense, if not for a growth jolt, perhaps for the sake of more diversification.
Lower rates are a big deal for just about every company that has a good amount of debt sitting on its balance sheet and a lofty amount of capital expenditures. For the small caps, it’s an even bigger deal, especially when you consider many need to rely on capital raises to fund their ambitious growth prospects. Indeed, it’s hard to tell how low rates will go in this new rate-cutting cycle. The Fed will need to stay in tune with the data and act accordingly.
Tom Lee is quite bullish on small caps
For now, though, I think the path of least resistance is lower as AI innovations look to negatively affect employment, while the Fed aims to make moves conducive to greater employment than trying to keep inflation closer to 2%. With Fundstrat head and the man behind Granny Shots ETF, Tom Lee, expressing his bullishness on small-cap stocks for the rest of the year and going into 2026, I think it’s time to consider giving some of the smaller names a second look as they look to catch up with their better-performing large-cap peers.
Indeed, Tom Lee has been quite accurate nearly every step of the way, and his views, I think, shouldn’t go ignored, especially as investors go on the hunt for cheaper opportunities in this frothy market.
Here are two small-cap stocks that could be great pick-ups for those looking to play a bounce.
Bath & Body Works
Bath & Body Works (NYSE:BBWI) is an interesting small-cap stock with a $5.5 billion market cap and a fairly lengthy growth runway. The stock has been under quite a bit of pressure in recent years, now down 65% from its five-year highs. With strategic turnaround efforts underway and intriguing partnerships that could reignite sales, I certainly wouldn’t sleep on the name, especially as interest rates look to fall further.
Indeed, the operating margin outlook is lower, but I think such pressures are already baked into the absurdly low stock. At 8.1 times trailing price-to-earnings (P/E), BBWI shares look like a bargain, as the firm readies to expand internationally while steering clear of tariff headwinds facing most other firms in the industry.
Build-A-Bear Workshop
Build-A-Bear Workshop (NYSE:BBW) is another shopping mall staple to add to your small-cap cart going into year’s end. Unlike Bath & Body, shares of BBW have been melting up violently of late. The stock is now up more than 89% in six months, and the run might not yet be over, especially considering the mere 16.3 times trailing P/E multiple.
Indeed, Build-A-Bear is more than just custom plushies; it’s an experience, and one that could experience greater demand as consumer spending heals further. Add collabs and lower rates into the equation, and Build-A-Bear looks like a winner poised to keep on winning. The $957 million firm won’t be for everyone, but I find it absolutely remarkable that the firm is doing well, even as retail headwinds weigh down most other firms in the mall.
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