Small-cap stocks are notoriously sensitive to sentiment, and the recent performance of meme stocks, particularly in the quantum computing and drone sectors, underscores the speculative fervour returning to the market. For example, stocks like Joby Aviation (JOBY $Joby Aviation, Inc.(JOBY)$ ) and IonQ (IONQ $IONQ Inc.(IONQ)$ ) surged by over 20% yesterday, driven by both strong retail enthusiasm and institutional momentum. Platforms like Reddit’s WallStreetBets and Twitter indicate that small-cap names are once again the focus of speculative retail investors.

From a valuation perspective, small-cap stocks remain attractive. The Russell 2000 ( $iShares Russell 2000 ETF(IWM)$ ) is currently trading at a forward price-to-earnings (P/E) ratio of 14, compared to the S&P 500’s 19. Historically, such valuation discounts have coincided with strong periods of small-cap outperformance. Furthermore, economic data points to a soft landing scenario, with GDP growth expected to stabilize at 2.1% in 2025. This environment is ideal for small-cap growth as these companies tend to thrive during economic recoveries.

Despite the favorable backdrop, there are risks. Small-cap stocks are more volatile and sensitive to macroeconomic changes, such as interest rate hikes or geopolitical tensions. Additionally, the sustainability of the rally in speculative small-cap names is questionable, as these stocks are prone to sharp reversals when sentiment fades.