Small Caps, Big Gains – Ep. 286

Welcome to the Accumulating Wealth podcast. I’m Judson Crawford. And I’m Hunter Satterfield. We are CPAs, wealth advisors, and partners at CWA, a financial services firm here to help business owners navigate the decisions they face every day. Today, let’s jump right into an investment market update and discuss what a broadening market means for investors. 

Market leadership may be starting to widen, and that can change both risk and opportunity in a portfolio. And joining us today is our resident market voice, Brad Sanders. He’s here to help us break down what’s driving it and what investors should watch next. Let’s go. 

We need a Brad Sanders, his… He needs his own intro music. Yeah. What would you choose as your intro music? Wu-Tang. Perfect. All right, next time, listeners, we’re going to have intro music just for Brad. A second intro song to intro the great Brad Sanders. Welcome back, Brad. 

Thanks, man. How you guys doing? Love story time with Brad, and we are we’re four months in to, We’re recording today on May 7th (2026). We always have to timestamp these ones because you never know what’s going to happen. Especially this year. Yeah. May 7th. We’re four months into the year, six months into sector rotation that we’ve been talking about with Brad for damn near two years now. 

So we’ll get into some of that, folks, today. But lots of interesting information, and may go a little longer today. That’s okay. Stay with us because story time with Brad’s going to be really fascinating, Judson, and I’ll just- It always is … I’ll start with a little stat that’ll maybe be something that we can talk about. 

So over the last six months, listeners, the large cap growth index represented by IWF, which is an iShares one that tracks the Russell 1000 growth index, is down 2%. That’s not very good. Nope. Over that exact same six-month period, small cap value, IWN, which is the Russell 2000, is up 18%. That’s a spread. 

So about a 20… That’s a bit of a spread. Which we call a spread That is what we would call sector rotation. And it’s actually really interesting. We’ll talk through the story, but, year-to-date, S&P’s up 7%, just ripping through these on my phone real quick. Nasdaq’s up 11%. Mag-7 is up only 5%. International’s up 6%. Small Cap’s up 14%. 

So lots of interesting things and I think maybe, Brad, the best place to start is last week, which was, like, earnings day for all these mega caps. Let’s see who, who all reported. It was Amazon- The same day. It was, like, Amazon, Google, Microsoft, and one of the others, like, all in the same exact afternoon. 

Yeah, and it was all, like, really good from an earnings perspective. Earnings are growing, things are really positive. But the very next day, I mean, Google was up 10%, but then everything else, Microsoft, Meta, and Video were all down +7%. Yep. Right? I mean, it was a very red bloodbath day, which was the last day of April, which I think really triggered some of the indices. 

And I think the story behind that is quite interesting as we sort of, double-click into some of these things. So, listeners, we’ve been talking with Brad. Judson and if you’ve come to our annual meeting on the main stage, we’ve talked about the sector rotation. But let’s just set the stage very quickly. 

Over the last 20 years, the focus in the market has been on asset-light companies, right? So scaling intangible assets like software, for instance. You write some code, you write some software, and you just scale it to the masses, right? And it just creates all this profitability for your company. 

And then they just pile that cash on their balance sheets, right? And so these mega companies have just gotten bigger and bigger, and their cash has gotten bigger and bigger. And so you’ve heard all these terms get thrown around like buybacks. Of course, they’ve done all their acquisitions and all that type of thing. 

I think maybe one of the most interesting things in the reported earnings last week, Judson, which really started to trigger people, not just the total CapEx spend, but Amazon free cash flow for the trailing 12 months is $1.2 billion, which you might… Anyway, that’s, that’s- No, that sounds great. Sounds like a lot. 

It’s a billion. It’s a billion, $1.2 billion. The prior trailing 12 months was $26 billion. Hmm. So it’s down 95%, right? Yeah. Brad, why? Where are they spending their money?  

 Data centers trying to stand up their own power supply, which the government, and I forget what that act was called, but as basically saying, “This is what you guys are going to have to do. 

You can’t put the onus on the communities you’re building these data centers in. We can’t have everybody’s energy costs tripling so we can run a data center in your backyard.” So it’s a tremendous amount of CapEx spend. At the same time, the demand for all that has pushed all the raw material costs up, too. 

So when you see these numbers dropping like that, they’re saying last year we’re going to spend $100… Let’s say they were going to be $100 billion, well, that same $100 billion is going to be $150 now because the price of copper and, and aggregate and everything has, has moonshot. So that’s where the money’s going. 

Yeah. They’re pouring all that money in. And to your point, the reason the stocks are down so much is you’re doing this without a clear pathway to profitability, so you’re basically burning this cash. Now, you could say it’s just like fiber we eventually used it all. 

That’s fine, but when you’re trading at the multiples these companies are, they’re trading like that’s going to be here in two to three years. Like, the price you’re paying for that business is like these dollars are going to pay off in three years, and it’s not clear that that’s going to happen. So if it’s going to take 10 years, then you’re massively overpaying. It’s like Cisco in, in 2000, right? 

Yeah. So let’s double-click on some of these things when we talk about what he’s saying here, right? So at the beginning of the year, CapEx spend expectations for the four hyperscalers was $600 billion. As of these earnings last week, it was $725, and that’s not because they’re spending… 

They’re doing more of them, it’s just the things that you have to do cost more, right? Right. So $725 billion now expected for 2026. For all of last year, listeners, that was $360 billion. So, and when you think about $725 billion into our GDP, I mean, Brad, that’s a 2% move of GDP. Yeah. It’s this insane number for growth for the economy. 

And so when you think about that and say, “Okay, well, if it’s $725 billion now, Judson, we’re probably going to spend a trillion over the next 12 months,” right? And you start to sort of unpack, okay, what does a trillion dollars of data centers mean? Now, before we get to that, why? 

I think that why is super important, and I think the why is probably best explained in the Anthropic SpaceX announcement that came out earlier this week, Brad, where basically Anthropic was out of… 

So you have to understand, listeners, that in the sort of AI world, there’s what we all use it for, ChatGPT and all this fun stuff, and then there’s the ERP, the enterprise level, right? Yeah. All the coding that’s happening. And Anthropic is the leader in that space, but the problem was, is that Anthropic’s users, like all these people that are doing their own coding for their businesses, they were running out of compute. 

Yeah. And you can’t just stand up data centers overnight. And so Anthropic, before they IPO, is running in a situation like, “We don’t have compute. Our users are frustrated. They’re paying us monthly fees.” And so Brad, what did they go out and do early this week with SpaceX?  

They basically, Elon has built these tremendous gigafactories where he has, like, multiple and excess of compute, and they basically just bought space on his deal. 

And to your point, not only were their users getting frustrated, but they were having to, like, turn off modules in their mo- Like, th- they were basically like, “This could be going three times faster, but we don’t have the compute, so we’re going to have to slow it down.” But now they’re going to be able to kind of… 

It looks like they may win the, the ChatGPT Anthropic race because they’ve focused on the enterprise level, and they can go full throttle now. 

 Exactly. So if you think about it, it’s like these companies are demanding compute, but to stand up a data center, unless you’re Elon, who can stand it up in, like, four months- And not everybody has an Elon Yeah, exactly. 

Everybody else to stand that up is going to be a trillion dollars of CapEx over the next year. So setting aside whether or not we can actually use all that compute, which there are different opinions on that, whether we can or not’s it’s more so where does this trillion dollars go? 

So Brad, you talked about it, right? It’s infrastructure, it’s energy, it’s manufacturing, it’s industrials, it’s raw materials, it’s all those things. So users, let me just give you a breakdown very quickly because this is essentially where all that capital’s flowing. It’s flowing off the balance sheets, off the free cash flow of these mega caps, and is going into these smaller companies. 

And when you look and you break down what makes up IWN, which is that small cap index, let me just break it down for you. 12% of– There’s a financial component, so 20%’s financials. That’s mostly regional banks. Yeah, regional banks. Yeah. Yeah, and all of our listeners know that. If you’re a local bank in town or whatever else it is. 

So, but the very next component, 13%, is industrials, machinery, construction, aerospace, transportation. 10%’s real estate. We know that. 10%’s healthcare. Energy’s 9%. Consumer discretionary, which is like retail, autos, consumer services, is another 9%. Materials, metals, mining, chemicals. I’m not going to keep going through this, Brad. 

The point is, is that a lot of that infrastructure of where the trillion dollars is going to flow over the next year are these companies-these small cap companies, right.  

It’s, easy to get kind of lost in the sauce when you start throwing around a trillion, the number a trillion, but economic statistics are muddy, so, you kind of have to just read them at, like, a very high level. 

But that trillion dollars you mentioned, that’s like a 2% or whatever bump to GDP. It does- It’s not just a trillion dollars, because that money goes to a company who then turns around and spends it. And so when you did the math last year, they estimate that all the money being spent by the hyperscalers on the data centers is a third of GDP last year. 

That’s a big number. That means that $1 trillion, if you do a third of GDP, is basically turns into $8 trillion in our economy. So that’s why it’s massive, and that’s also why these companies that are spending that money aren’t getting rewarded for it anymore because people are following the dollars, right? 

Right. So y- you see the real numbers, and Judson, I’m going to kick this over to you for the numbers. So during that six months, you went and said basically, “Hey, what are these different things like infrastructure, materials, industrials, what is the performance of each of these?” Y’all listen to these numbers, they’re staggering, over the last six months. 

Well, let’s go bottom up, okay? The lowest performing was transportation and logistics at 12.33%, followed right behind that at industrials at 12.59%. Then, a small 5%, or almost 50% more than that, is infrastructure at 17.68%, materials at 20.16%. Six months, guys. And then leading everybody, energy at 35%. 

35%, which, and some of that’s going to be Iran related, and we can talk about that, but like Judson, when you said those numbers, I was, I was staggered by it, right? Because you’re just talking about crazy numbers over the last six months while, again, the Russell 1000 growth is down 2%. Yeah. Yeah. It is this rotation that we have been talking about. 

And it, I would, argue we’re in the second inning of it, too. If you look at the Russell 2000 and the way I like to zoom out and look, historically, small caps are, like, 8% of the actual aggregate stock market. It’d gotten down to 2%. So if you mean revert, you’re going to go up 3 or 4X from here. That’s why we’ve been talking about this for so long. 

Well, and for our listener, when we are talking about this, and if we go back to, like, the example you’re using with Amazon and, and they’ve had to spend this much more on what they had planned on doing, and it’s likely only going to increase over the next year, when you think about the question of, oh, well maybe it’s just this brief pause for, like, this technology section, or the Mag-7, but if you think about pushing that conversation later, right? 

Now we’re talking about all this spend, and the only way that that stock price stays the same or maybe goes up is if the top line increases only, thereby that much more. Yeah, yeah. You’re hitting on the, the key part here, and we’ve talked ab- I think I talked about this last year. If you look at secular growth rates for the, just let’s talk about the Mag-7. 

If you look at Google Microsoft, and Meta, they’ve been in structural decline for the better part of five years, going from mid-teens to, to mid-sing- to low single digits. It’s because of the size of the company. You can’t grow a trillion-dollar company at 20% a year. There’s just not enough dollars. 

Like, it just doesn’t work like that. But they’re trading at multiples like they’re still growing 20%. And so then when you start spending all this money, and now your free cash flow is contracting, and you’re not having a, a return of profitability to match that, it’s going to compress your multiple. And the money in the market, like the very simple thing is money tends to go where the growth is. 

You’ve got these big companies, while they’re huge and they’re great and they’re not going away, trading at 20, 30, 40, 50 times earnings. You have a small cap company that’s growing earnings, 20%, 25%, trading at 11 times earnings. Where’s the money going to go? It’s naturally going to gravitate there over time, That’s just how markets always work. Well, and it’s hard to think about, but I mean, we have to understand that really good companies that are going to be around for a really long time can go through long periods where their stock price doesn’t feel very good in your portfolio. Yeah. Bottom line. Yeah. 

Yeah. And- Great company, bad stock is, that’s always, like, a case. There’s always one of those. Yeah. And you mentioned Cisco earlier because it, in 2001, Cisco, backbone of the internet, like, there’s no way this thing doesn’t fly higher, and Cisco’s still around. They’re not bankrupt, but it’s returned 1.5% per year in 25 years. 

I mean, it’s been a very bad investment because… And we’re not saying in any way that, that these big mega cap companies are going to be that way. But let’s talk about, so, like, Cisco created the internet as is, and then the internet went, and the second and third and fourth order effects of where that capital flowed is, I think, the interesting story. 

So let’s talk about the second and third here. So all this compute gets generated by AWS or, or Google or whoever else it is behind the scenes. All right, well, what is that doing? So, like, when we talk about, ERP solutions and, and what that looks like for a small cap company, Judson, I think it’s best to probably just use ours, right? 

So, our team here internally is super cutting edge on what they’re doing, and we are using a lot of tools on Claude to do our own coding here, right? Where we are actually using natural language, and we’re just saying, “Hey, we want this for, potential client benefits.” And I think that the implication of that is, is that we are actually going to improve as a company by using what is out there and being generated in all of that compute right? 

So you start to see very similar to the internet story, where it created all these other profitability metrics in these companies. I think that’s the implication here, which is- Companies that are really cutting edge and are progressive are going to begin to use the technology to improve their bottom line, right? 

And that that means that, that’s to your point about the second or third inning. It’s not even just the continued infrastructure that has to get done, it’s the impacts on all those small companies out there that improve themselves because they’re now doing their own coding or whatever else it is. 

Well, and I think that’s what when you say their own, what goes alongside of that is not only can we do this and make ourselves more efficient, make the experience for our customers better, but we can do so without going and supporting some other businesses at these huge contracts that we used to have to do to get a fraction of done of what we were, right? 

So economically, we’re able to help our own business without going and supporting others, and that affects those other businesses. 

Yeah, what you’re describing is efficiency gains. Correct. And that’s the first order effect of all this AI stuff, and I can see it. My wife’s the planner here, and- What? 

She was showing me… but that’s for the listeners, not you guys. She was showing me, when she’s doing quarterly calls with her clients, she’s like, “This used to take me an hour. Watch this.” And it was like, It can pull up every email that anybody on her team has sent to that client and bullet point it for her in 10 minutes before she gets on the phone.  

Well, that’s like 50 minutes of a day that’s now she can use to do something else, and, and everybody’s going to be impacted by that. That’s how you grow this economy so much. It seems like it’s this big, bloated thing and we’re mature, but the efficiency gains by every worker in the country are going to be pretty powerful. 

But the problem is you can’t spend efficiency gains, right? It’s have to turn into profits at some point. 

Yeah, and I think that, that’s like when y’all, listeners, when you’re hearing, like, about this Anthropic IPO that’s coming this summer, could be, what, $2 trillion, Brad, at this point? I mean, it’s going to be big. 

Yeah. It’s, it’s going to be real big. You can say whatever number you want at this point. Yeah. You know?  

And for those that are wondering, like Claude, and if you hear the word Claude, like Claude AI is it’s named after Claude Shannon, who’s the pioneer of, the father of information theory, but that’s that ERP product that’s being used by everybody, and that’s what makes Anthropic so powerful. 

But the reality, again, as you hear about these things, now you start to understand like, oh, that makes sense how they can IPO at $1 or $2 trillion. Which we’re going to talk about the IPO impacts on the markets here in a few minutes.  

But before we do that, Brad, I want to go back to, so like let’s, let’s say this sector rotation continues, and a lot of this trillion dollars does in fact impact the small and midcap indices. 

Listeners, I think it’s important for you to hear. I’m going to say this, and I’m going to let Brad underpin it. The market cap of the S&P is, like, $60 trillion. I mean, it’s massive, right? It’s huge.  

It’s basically the stock market at this point. Like, the, the overall stock market’s, like, $65 trillion, and the S&P’s $60 trillion of that. 

Exactly. It’s crazy. Y’all, midcap, listen to this. Midcap is only about $3 trillion. Small cap, represented by the S&P small cap 600, is only about $1.5 trillion. Yep. So just think for a second, if, of this $60 trillion, and there’s so many things, Judson, when we start talking about the IPOs that are coming too, because that’s going to absorb some of this capital as well, but if this trillion dollars moves from the 60 down to the small and midcap markets, you’re talking about a 25% to 50% increase immediately in revenues to those small companies. 

Because those market caps are so small, right, Brad? Yeah. 

Like I mentioned earlier, the small cap’s about 2% of the overall market. It’s normally 8%. So, you spend that whole trillion on just the small caps, you’re going to double the small cap market, like, in a year, basically. 

So yeah the amount of, like, upward leverage here is, is tremendous. And most of these companies, have really good margins and stuff, so profitability metrics. Small caps already had built-in high teens year-over-year earnings growth this year, like, no matter what happened on spending. 

It’s just a math equation. And now that you start layering this on, it’s g- I’ve, I’ve been watching the market lately. There’s stocks making crazy- Well, why don’t we- … bananas moves. 

Yeah, why don’t we just double-click on one of these holdings that one of our small cap- … managers had in their portfolio. And we still own some of it. 

We had to trim some of it just because it got crazy, but you want to tell that story real quick? Because it’s been bananas this year. Am I allowed to say the name of the company? Don’t say the name. Okay. Just- yeah. The, there was a small cap, let’s just say this company makes something that goes into a data center, like one component. 

This manager started accumulating this stock last year at around $11. And it was about a 2% position, 2.5% position in their portfolio. At the beginning of April, it was 17% literally on April 1st, and so you’re like, “Oh, wow, about a 50%, 55% gain there already in a year. 

That’s awesome.” we sold a bunch at 75% in the in the third week of April. It’s over 80% now. But that 2% position in that portfolio had become an 8% position in four weeks. So we trimmed it down to 4%. So we still have double the amount in the portfolio that we did back then, and we’ve sold so it’s crazy. 

And that’s just one- company, like one small company. A lot of these companies are shorted, so when that happens, you get short covering, and they just go, they go astronomical. And I’ve seen big moves in a lot of companies that we own and don’t own recently that we just haven’t seen in a while. 

 So just wondering, while we’re talking about this, because I think it’s so interesting for our clients to hear about how their managers operate in these situations. So this stock price went bananas. It got up to this price and you said, “Okay, we need to trim this.” Was that a decision purely based off the percentage of the portfolio that it was now taking up? 

Yeah. Or was that also because it hit a certain metric where it said, “Hey, we said if this company gets to this level, we need to trim it”? Does that make sense? Yeah, it, more regularly, it is a position size limit. So these managers will say, “Hey we can’t have anything in our portfolio over 8 to 10% of the portfolio.” 

And it’s just a good way to operate diversification-wise. And so when they start seeing something get up there, they’ll naturally trim that down so it doesn’t become outsized on the portfolio. In this case, the valuation looks insane now. Yeah. 

It’s, it, like, they’re, because they’re basically, they came out, had their conference call, and they said, “Orders were double what we were expecting, and we’re expecting a forward run rate of, like, 3X that,” and so the stock goes nuts. 

Well, now based on where it is it’s really expensive, so they were like, “We need to take some off the table here.” But they didn’t want to sell it all, obviously. It’s, it’s, that’s when they’re going to- 

Well, it’s interesting because, I mean, I think from our listeners’ standpoint who are invested on it, it’s an interesting way how not only the manager’s making you money but also protecting your portfolio going forward.  

Yeah, they’re all very disciplined. Yeah. You have to be or you can get yourself way over your skis really easily. 

So before we move into the international, and listeners, we’re going to keep going here, so it’s just really interesting stuff. Before we move into the, kind of the international scene and then also the fixed income scene, Brad, I think it’s – we would be remiss not to talk about the coming IPOs. 

And, and we don’t, we really don’t know. I mean, SpaceX now, I don’t even know that, I mean, Bank of America said $2 billion, or excuse me, $2 trillion earlier this week after that, the announcement of Anthropic. I mean, I don’t even know. Just pick a number. It doesn’t really matter at this point. Because especially if you look at SpaceX now with xAI, this relationship with Anthropic and the opportunities they have for space and, I mean, just the vertical integration and supply chain integration that’s happening there is bananas. 

It looks like we’ve got a Terafab coming now to create chips. I mean, it’s – if you put all this together, it’s like you can’t pick a number for most of these companies that doesn’t make sense for some people. But I think the implications of, we’ll just take the big three, which would be SpaceX, Anthropic, and OpenAI, who are all going to, in all likelihood, IPO this year. 

You’re talking about at least five, I mean, we’re talking about probably 10% of the market cap current market cap- Yeah … is easily coming in with these new companies They’re all going to IPO and be a top 10 company market cap wise, like, on the first day. Right. 

What are the implications for the rest of the index, right? 

Because that capital flow that’s coming from 401ks and things like that’s going to naturally move toward those three names as they IPO. Yeah. 

I’ve been trying to wrap my head around that, because typically when you IPO a business, you get all these investors to invest in it and that’s what the IPO price is and all this stuff. 

And but when you start throwing around numbers these big, to your point, it’s 10% of the market. It’s like, where is the money going to come from? It’s not going to be Grandma and Grandpa’s IRA, right? That’s just not how this is going to work. And so I think the only natural place it’s going to come from is the Nasdaq. 

You’re going to have to reshuffle the kind of weighting of that index, and that capital’s going to have to flow out of some of these more legacy names that it’s been in to fund these new IPOs. So I think people naturally think, “oh, the Nasdaq is going to get $10 trillion bigger day one if these all come out.” 

No, it’s going to stay probably the same weight, and it’s just going to shift all that capital. So you’re going to see multiples compressed. I think a lot of that’s going to come from software stocks. You’re going to see a lot of kind of these legacy businesses that have enjoyed 30 times multiples that aren’t growing that way. 

Those multiples are going to shrink because you have to make room for the big boys. 

So money’s not going to flow out of the small cap market and go into S- SpaceX, right? So when you, when you think about that, like, and again, I know I’m not asking you to project or, whatever, but, like, what kind of percentage swing could that make on something like the Nasdaq? Just the new IPO. Does that make sense? If it really does have to come out of that. 

Yeah, I don’t think it really goes up much. Yeah. I think the, those individual stocks go up, but I think the other ones go down. Right. Exactly. Yeah. So I’d, I think, net, net, you’re probably treading water would be my guess. 

Also because these – you know, SpaceX, if it comes out at a $2 trillion valuation, that’s, like, 800 times earnings. Like, it’s… you’re not buying SpaceX based on its price to earnings multiple. You’re buying it because of Elon and what he might do with it, and, and maybe we do go to Mars or whatever science fiction stuff we can start talking about there. 

But , I mean, you can’t create that amount of capital out of thin air. It’s not just going to come from, from nowhere. 

Couldn’t that, in theory, cause managers to start thinking about trimming back on some of those other stocks? Yeah, I think we’re seeing it. I mean, and, yeah, so perpetuating what’s already happening almost in a way. 

 Even our large cap guys are doing that. Yeah. Right? Yeah. They’re trimming a lot of those positions because of that. I mean, it’s, again, it’s this sort of like- nobody really knows, but the logic tells us something’s have to change from where it currently is.  

Yeah, and this is just the natural order of things. Anytime you get a transformational technology, there’s been like four, right? There’s been like the railroads, and then fast-forward to the internet, and now you got AI. There’s this book called “Engines That Move Markets,” and like every time you introduce one of these, you have a huge rush, everything gets priced really high, and then you have some sort of market event where it craters, and then out of the dust comes the new transformer. 

And if you read that book, it’s like a textbook, don’t take it to the beach or anything, but if you read the book, they’re saying about the railroads what they’re saying about AI now, like 100 years ago. They’re saying, “Well, it’s going to take all our jobs. Who’s going to move this lumber?” But think about all the jobs that were created because of the railroad system. 

You’re saying, you said the same thing about the internet. There’s not going to be any stores anymore. And now look, and like they’re saying the same thing about AI. It’s probably going to be the same thing rerun, and you just have this period of excess and then by the time those, that cycle completes itself, generally the technology’s here, And that just seems to be what’s happening again. 

Okay. Incredible conversation, guys. But listeners, we told you we might go a little bit long. 

We haven’t even touched what’s going on in the Middle East. We haven’t touched the bond market. So we’re going to hang up, listeners, but before we do, I’m going to tease our next episode.  

In the last year, the international markets are up 31%. So we definitely have to cover that. So we’re going to do that. We’re going to do the bond markets. 

We’re going to do all things Middle East when we come back with Brad. Come join us again. 

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