Welcome to FinTech TV.
I'm Remy Blair.
Early 2021 felt like a heyday for small caps.
Retail traders had cash from stimulus checks, and mean stock mania drove in companies with catchy tucker symbols regardless of fundamentals.
Since then, AI and tech giants have driven market gains.
The Mag 7 carried S&P 500 earnings.
Google just hit a $3 trillion market cap, and both Microsoft and Nvidia crossed the $4 trillion mark.
Now overall, large cap growth has dominated the market for nearly 14 years, while small cap value has lagged far behind.
Bank of America points out that the performance gap between the two is now the widest since the dotcom.
Bubble matching extreme levels last seen in 2000.
And while mega caps have mostly ignored valuation concerns and kept climbing, some funds are starting to look toward small caps, betting that the tide has to turn at some point.
Well joining me here is Chris Toles, CEO and investment team manager for Toll and Company.
Chris, welcome.
Thank you so much for joining me.
You're welcome.
Great to be here.
Well, 2025 has been quite the year, but as we head into year end, we're taking a step back and looking at performance when it comes to large versus small caps.
So what do you make of what we're seeing right now?
Uh, the large cap growth story has been pretty extraordinary.
I think it's a great example.
It's a manifestation of an obsession, frankly around AI and the cap X and spend in that space, and it's really, really gotten the attention of capital that would historically maybe drift into other areas of the market to really drive into the large cap growth, you know, the AI, the mag 7, and it's really interesting to think about the The peak, if you look at the top 5 stocks in representation of the S&P 500 back at the dot com, they represented 16% of the market cap, and today you're looking at 30% of total S&P 500 market cap.
So we're in a situation where there's just extreme concentration and a sense of a sense of crowding.
It's it's an overbought trade.
Yeah, and speaking of which, when we're talking about concentration, of course we're looking at the mag 7 and the S&P 500, but when we shift our focus on over to small caps, give us your take on where you see undervaluation, and can you break that down for us?
Yeah, so it's very interesting to look at some of these sectors that are really economically sensitive.
The economy has been kind of going through a rolling recession over the last say 3 to 4 years.
If you just look at trucking and freight tonnage, trucking rates.
Rates those have been recessionary in nature.
Same with the housing market, it's basically been locked due to obviously higher interest rates and mortgage rates and affordability.
We've also had what, 6 months of PMI under 50, which means the manufacturing base in the United States is really in contraction mode.
So these, these, this is.
Related surrogates to those areas or where there's tremendous value in the market today, especially with what's coming.
And speaking of what's coming, when we look at the bigger picture and we focus on macro, of course there are expectations for the Federal Reserve to. it's rate cutting cycle this time around, but the environment is quite different, isn't it, when we take a look at what's happening underneath the hood and of course the economy despite some of those headline figures that we're getting.
So what does this mean for small caps.
Um, so I can speak to small cap value, and that's the space that we're in, right, basically being in the procyclical parts of the market.
It's a remarkable set up because no one owns small caps and small cap value in particular is, is dislocated.
I call it double dislocation.
You've got the small cap dislocation, then you have a value dislocation on top of that.
Um, so it's a wonderful set up when you're in when you have a situation where parts of the economy are deeply undervalued, under-owned, and you're heading into a period of stimulus right when you combine the rate cuts which are very favorable to small caps, and you combine that with the one big beautiful bill which is very, very important for basically accelerating and relaunching the capital cycle and it's really the domestic capital cycle.
And the third point I'd make is really the AI, right?
And so we're moving from a period of overinvestment in AI and where the owners and those who control the development of AI have been leading the charge, and it feels like that shift is going to happen, right, moving from They open and chat GPT to basically the implementers and users of AI, which are going to greatly benefit in our view, small cap companies.
That's where it will be a disproportionate benefit in our view.
So those are the three big trends we think are pretty powerful setups for small caps.
Yeah, and I do want to zoom in on the latter trend because you highlighted the headwinds as well as the tail.
But when it comes to those AI pure plays, when we hear what's happening in artificial intelligence, we might hear about tangential plays whether we're talking about data centers or energy.
But where do you think these opportunities are?
Well, it's really for these organizations that are again economically sensitive, tend to be a little more capital intensive, tend to have smaller margins.
The the pickup and productivity for say a trucking company, a manufacturing company, is, is pretty, pretty extraordinary and and when you have sort of those fundamental changes in how they can drive margins higher through cost efficiencies combined with a macro tailwind with rate cuts, right, and and the big beautiful bill, it's it's a recipe for.
For good news, good times ahead for small cap investors.
And finally, Chris, before I let you go, I do want to hear more about Toll's track records.
So can you break this down for us?
Yeah, so we just launched our ETF symbol TCV.
We did it in July.
Really grateful to be in the active ETF space.
Our long term track record is very good.
We've basically been facing headwinds given all the all the dynamics we just talked about, so we're.
Kind of positioned, I'd say in a lot of ways the boutique small cap value shops like ours are far, you know, there aren't many of us left, right and so we've had the good fortune of having the right capital base, the right structure, the right team, the right process in place to basically weather some of these deep cycles that we've seen, experience and small cap values.
So I consider.
You know, the last of the Mohicans and we're kind of positioned well with very good capacity in a public facing vehicle now with TCV to be able to really really serve the investors who are looking to rotate out of you know the large cap growth and the AI and the crypto plays that have dominated this market really since 2023.
So we're thrilled.
Chris, great to have you here on set at the New York Stock Exchange.
Thank you so much for your time and thank you for sharing your insights and perspectives.
Thank you.
Thank you very much.
