By Shashwat Chauhan
May 27 (Reuters) - U.S. small-cap technology stocks are surging after years of underperformance, a sign of how the AI frenzy is pushing technology investors to look beyond the Nvidias and Intels of the world.
Record U.S. equity inflows are moving beyond megacap firms into smaller companies that have flagged strong potential to benefit from the growing adoption of AI. The Invesco S&P SmallCap Information Tech ETF has seen $49.7 million of inflows so far this year after clocking outflows
for four straight years, according to LSEG Lipper data.
"The AI trade has broadened quite materially," said Oren Shiran, portfolio manager for Lazard US Systematic Small Cap Equity ETF. "Small-caps have become a real part of the second and third order of AI."
Smaller technology companies can offer improving earnings prospects, relatively cheap valuations and a broad array of businesses related to the AI buildout, investors say, including chipmakers, data center suppliers and network equipment makers.
The S&P 600 small-cap tech index has gained almost 54% this year, compared with a 20.1% rise in the S&P 500 technology index, putting the gap between the two at its widest since before 1995, according to Trivariate Research.
However, strong rallies this year in technology stocks, both big and small, have spurred talks of an AI bubble, and some analysts have also warned that speculative trades could be helping lift small-cap stocks to record highs.
The price of small-cap tech stocks has more to do with "speculation and less on changes in fundamentals relative to large-cap stocks," said Hal Reynolds, senior portfolio manager at Los Angeles Capital Management.
Higher government bond yields worldwide could also dent the sector's appeal, given the higher economic sensitivity of smaller technology companies and their reliance on debt-fueled growth.
WHAT OF EARNINGS?
Small-cap semiconductor companies have been among the sector's top performers this year, mirroring a stunning rally in their larger peers as massive capital spending on data centers and AI-related infrastructure has boosted chip demand.
They are expected to post profit growth of nearly 40% in the second quarter, according to LSEG data. However, analysts predict earnings growth for the broader small-cap tech sector will be just 7% in the next quarter, excluding loss estimates for bitcoin miner MARA Holdings.
"Investors are speculating that some companies can benefit from AI, either through share-gaining solutions or productivity, driving optimism about earnings growth," said Adam Parker, Trivariate Research's founder and chief strategist.
Some of the best-performing stocks this year include network test and optical security products maker VIAVI and semiconductor firm MaxLinear, which in its most recent earnings report posted a 43% jump in revenue, citing demand from hyperscale customers.
Shares of MaxLinear, VIAVI, Ultra Clean and Vishay Intertechnology have posted triple-digit gains in 2026. But their profitability has been inconsistent.
Both MaxLinear and VIAVI have swung between quarterly profits and losses since their inception.
Shares of semiconductor equipment component maker Ichor Holdings have jumped about fourfold this year, even though it last reported a quarterly net profit in December 2022.
(Reporting by Shashwat Chauhan in Bengaluru, editing by Colin Barr and Shinjini Ganguli)
