After two years of underperformance, small-cap equities are starting to re-enter institutional conversations. In 2023 and 2024, rising interest rates and persistent inflation battered small-cap valuations, especially for firms with high debt loads or limited pricing power. But in mid-2025, several catalysts are creating a more favorable environment.
The Federal Reserve’s hold on rates, declining wage pressure, and improving supply chains have compressed the valuation gap between small and large caps. Meanwhile, the Russell 2000’s forward P/E multiple remains well below its 10-year average. That has value-focused managers taking a closer look — not just for cyclical upside, but for overlooked growth.
Where Fundamentals Are Catching Up With Price
Some of the most promising small caps now aren’t speculative tech plays, but companies with disciplined capital structures, pricing leverage, or exposure to underappreciated themes. Mid-2025’s opportunity isn’t about finding the next 10x disruptor — it’s about spotting companies that were oversold in the 2022–2023 drawdown and now benefit from normalized input costs or favorable regulatory shifts.
InMode (INMD), a medical device manufacturer in the aesthetic procedures space, has begun to reaccelerate top-line growth as consumer spending stabilizes. Analysts have started revising full-year revenue projections upward, citing international expansion and procedure-based demand. Shares are still trading below 2021 levels despite a healthier balance sheet and growing EBITDA margins.
Bank of Hawaii (BOH), while not a flashy pick, has become a value target amid regional banking stabilization. After the 2023 fallout in smaller lenders, BOH’s conservative balance sheet and strong deposit base position it as a recovery story tied to a high-income, low-default geography.
Energy and Industrials Regaining Momentum
Tidewater Inc. (TDW), a marine services firm for offshore energy, is quietly benefiting from increased global investment in deepwater oil and gas projects. After years of underinvestment in fossil fuel infrastructure, the market has turned — and firms like TDW are catching the tailwind. Its fleet utilization rates and day rates have been steadily rising, and the stock remains cheap relative to forward cash flows.
In specialty manufacturing, Atkore Inc. (ATKR) stands out. Focused on electrical raceway systems and tubing, it benefits directly from both U.S. reshoring efforts and public infrastructure spending. The firm has executed consistent buybacks, maintained low leverage, and recently raised guidance. As grid modernization and manufacturing capital expenditure increase, Atkore sits in the middle of the supply chain.
Selective Growth in Niche Tech and Data
Xometry (XMTR) is one of the more interesting names in digital manufacturing. Its platform connects buyers with suppliers for custom parts production — essentially the marketplace model applied to industrial components. While the company is still operating at a net loss, it has narrowed negative margins significantly and expanded recurring enterprise accounts. Investors are watching for a breakeven quarter by year-end, which could re-rate the stock sharply.
Veritone (VERI), an AI-based analytics firm, remains high-risk but is seeing real traction in media and legal workflows. The firm has pivoted away from open-ended R&D and is now focused on contractual revenue with defined use cases. If execution continues, especially in government verticals, it could outperform on a relative basis.
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