Best Ideas Smidcap Sweethearts 2026: Finding Opportunity Amid Economic Uncertainty

What You Need to Know:

• The TD Cowen Smidcap Sweethearts report highlights investment ideas among companies with market caps below US$15 billion.
• The U.S. economy remains resilient, supported by employment, consumer spending and AI infrastructure investment.
• Smaller businesses face greater pressure from higher costs, policy uncertainty and uneven access to capital.
• "K-shaped" capex is emerging, with large companies investing while many smaller firms pull back.
• Key policy themes include inflation, defense, bank consolidation, energy infrastructure, healthcare funding and tech/media regulation.
• Small and mid-cap companies may benefit as inflation eases and conditions become more predictable.

The TD Cowen annual Smidcap Sweethearts report highlights some of our top investment ideas among companies with market capitalizations below $15 billion, while also providing a broader look at the economic and policy trends shaping the environment for smaller businesses. This year's report finds that although the U.S. economy remains resilient, many small and mid-sized companies continue to face challenges from higher costs, policy uncertainty and uneven access to capital.

A Resilient Economy—But Not for Smaller Businesses

Despite geopolitical tensions and recent energy market disruptions, the U.S. economy has shown remarkable stability; employment levels have remained relatively strong, consumer spending continues to support growth and investment in artificial intelligence (AI) infrastructure remains a major source of economic activity. However, the benefits of this resilience have not been evenly distributed. Smaller businesses are facing greater pressure from rising input costs and ongoing uncertainty, while larger corporations have generally been better positioned to continue investing and expanding.

Inflation Remains a Key Risk

Recent energy market disruptions have increased concerns about inflation, particularly through higher fuel costs and supply chain pressures. While our economists expect inflationary effects to moderate over time, businesses today are still navigating elevated costs.

As a result, the Federal Reserve is expected to remain cautious. With inflation still above target and labour market conditions relatively stable, policy is likely to remain on hold indefinitely.

CPI Inflation Expected to Stay Elevated for the Rest of 2026

The Unemployment Rate Has Stabilized

The Effects of "K-Shaped" Investment

One of our central themes is the emergence of what we describe as "K-shaped" capital expenditure (capex) — a market where large companies continue to increase spending while many smaller firms pull back.

Large technology companies building AI infrastructure is driving much of today's investment activity. While these investments propel economic activity, smaller firms often lack the resources to participate at the same scale. The increased competition for equipment, technology and financing can leave smaller companies at a disadvantage.

Survey data suggests many small business owners remain hesitant to expand amid uncertainty around costs, demand and broader economic conditions. Expectations for hiring and capital spending among small businesses have remained subdued compared with larger firms.

Small Businesses Matter for Economic Growth

Historically, small businesses have played a critical role in job creation and economic growth. Many have borne a disproportionate share of recent economic challenges, but we believe they could also stand to benefit significantly once inflationary pressures and supply shocks ease.

As economic conditions stabilize, smaller companies may be well positioned to resume hiring, investment and expansion activity, helping broaden the next phase of economic growth.

U.S. Policy Themes to Watch

We also highlight several U.S. policy developments that could influence small and mid-cap companies over the coming years. Key areas include:

• affordability and inflation,
• defense spending,
• bank consolidation,
• energy infrastructure,
• healthcare funding and
• regulatory developments in the technology and media sectors.

Notable themes explored in our full report:

• Continued focus on affordability and inflation as major political and economic issues.
• Growing opportunities in defense technologies, particularly drones and counter-drone systems.
• A potentially favourable environment for mergers among small and mid-sized banks.
• Increased support for energy infrastructure needed to power data centers and AI growth.
• Ongoing challenges for hospitals and healthcare providers as funding pressures intensify.
• Increased judicial involvement in merger reviews and media sector consolidation.

Looking Ahead

While uncertainty remains elevated, the outlook for many small and mid-cap companies may improve as inflation pressures moderate and economic conditions become more predictable. For investors, the current environment continues to create opportunities to identify high-quality businesses that can navigate near-term challenges and benefit from long-term structural trends.