AI exacerbates tech divide with smaller stocks languishing

by Ryan Vlastelica 

The massive outlays required to compete for artificial intelligence riches have widened the performance gap between large and small tech shares. 

A measure of smaller tech stocks is trailing a gauge of large-cap shares by the widest margin according to data compiled by Bloomberg going back 30 years. While Microsoft Corp. and Nvidia Corp. have soared 24% and 36% this year, respectively, boosting the large-cap tech index 16%, the small-cap tech index is down 1%.  

While megacap tech’s dominance is not new, the degree to which they are trouncing smaller companies on the stock market has become stark enough that analysts see little chance for the smaller firms to catch up. 

“There are certain resources that are needed for outperformance, and that’s why the large-caps are doing so much better — all the investment they make, all the power they have, that all translates to results and performance,” said Dina Ting, head of global index portfolio management at Franklin Templeton. “Small- and mid-caps just don’t have the ability or excess capital to compete.” 

Take AI investments. Microsoft alone is expected to pump $86 billion into capital expenditures in its 2026 fiscal year. That’s a sizable percentage of the entire market capitalization of the small-cap tech index, which stands at around $180 billion. 

Moreover, some of the smaller AI companies that have attracted attention in recent years are out of reach for small-cap investors because they choose to stay private. Notably, Figma Inc. waited to go public until it boasted a large-cap valuation. 

“The reason small-cap tech underperforms is we simply don’t have enough AI in small cap, and the AI we do have, it is very hard for them to compete because they’re so small,” said Steven DeSanctis, small- and mid-cap equity strategist at Jefferies.  

It’s not just AI spending that’s hitting the smaller cohort. Some, like Wix.com Inc. and Chegg Inc., ply businesses that could be made obsolete by the new technology. Shares in those two firms have tumbled 44% and 22% this year, respectively. A group of stocks has seen billions in value wiped out this year on similar fears. 

Among smaller AI companies, C3.ai Inc. plummeted this week in the wake of results that it called “completely unacceptable,” while another smaller AI play, BigBear.ai Holdings Inc., also cratered after its report.  

The selloffs stood in contrast to megacap reports, which were largely greeted warmly, or new behemoths like Palantir Technologies Inc., where robust results have helped investors look past a sky-high valuation. 

This earnings season, roughly 77% of small-cap tech companies have beaten expectations for both earnings and revenue, according to data compiled by Bloomberg. In comparison, more than 91% of large-cap tech have topped on earnings, while 85% have for revenue.  

“The market pays for growth, and the growth you see at large-cap tech is just that much better than you get in small and mid-cap tech,” said DeSanctis.  

He expects small- and mid-cap tech stocks will catch up some in terms of earnings growth as theirs accelerates and megacaps’ cools. But that likely won’t be enough to close the performance gap. 

“The question is, if we get more normalized earnings growth across the size categories, will that lead to a broadening of performance? We’re hoping for good times ahead, but have been for a long time.” 

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