Small Caps Are Crushing the S&P 500—3 Stocks Still Worth Buying

Small-cap stocks have outpaced the S&P 500 over the trailing three months through July 21, 2026, as investors rotate out of richly valued mega-cap tech.

UFP Technologies faces near-term earnings headwinds tied to product launches, but management expects those pressures to ease in the second half of 2026.

Willdan Group and NWPX Infrastructure show distinct catalysts, including AI-driven data center demand and a raised free cash flow outlook after a strong earnings beat.

Sector rotation doesn't always mean money moving from sector to sector. In many cases, investors see capital moving from large-cap to small-cap stocks. That's precisely the shift playing out in 2026, and the numbers back it up. Through July 21, small-cap benchmarks have meaningfully outpaced the S&P 500 over the trailing three months, as investors rotate away from mega-cap concentration risk and into names with more room to run. With mega-cap tech trading at historically rich valuations after years of AI-driven gains, both institutional and retail investors are hunting for the market's next leg higher. Small-cap stocks, many of which sat out the narrow rally of the past few years, offer that alternative.

But not every small-cap stock deserves a place in your portfolio just because the group is back in favor. Investors still need to separate the names with durable earnings power from those simply riding the wave. Below are three stocks that combine the sector rotation tailwind with company-specific catalysts worth watching heading into the back half of 2026.

UFP Technologies Stock Could Rebound After Earnings Headwinds Ease

UFP Technologies NASDAQ: UFPT is a contract development and manufacturing organization that specializes in comprehensive solutions for medical devices, sterile packaging, and other highly engineered custom products. In layman’s terms, it’s not the name doctors and patients see on the package, but it’s a critical part of the medtech supply chain.

In its June 2026 investor presentation, the company forecast that the global medical device market would grow to approximately $518 billion by 2032, with a compound annual growth rate (CAGR) of about 6.3%. For all the reasons investors may have to go long UFPT, earnings are the headwind. The company’s adjusted earnings per share (EPS) in Q1 lagged the revenue gains. Management attributed this to several factors, including its simultaneous product launches. Those headwinds are expected to abate in the second half of 2026. That will be a key point of emphasis for investors when the company reports its Q2 2026 earnings. Heading into earnings, UFPT was up 23% over the three months ended July 21, but has dropped about 13% from its 52-week high in early July. That’s likely a function of elevated short interest and institutional selling in Q2. The stock is testing its 50-day simple moving average as support.

Willdan Group Benefits From AI Infrastructure and Data Center Growth

The artificial intelligence (AI) infrastructure buildout is facing supply headwinds. In addition to data centers taking time to construct, the need for power must be addressed. That power demand also requires cooling solutions to handle the heat generated.

That's where Willdan Group NASDAQ: WLDN comes in. The company provides energy efficiency, infrastructure engineeri...