Why the Next Market Cycle Could Finally Favor Mid and Small Caps

Deregulation might be the most underappreciated market catalyst on the horizon. While headlines fixate on tariffs and tax policy, the potential reduction of regulatory burdens could unleash a wave of growth for America's small and mid-sized companies that have languished in the shadow of mega-cap dominance.

The burden of regulation falls disproportionately on smaller businesses. When a company must comply with complex regulations, the associated costs impact a small or mid-cap's bottom line far more severely than they do for cash-rich large caps. This regulatory disadvantage may partly explain why smaller companies have struggled while the S&P 500, dominated by a handful of tech giants, has soared to record highs.

Consider the potential impact across sectors: HVAC companies freed from strict emission standards, energy firms with streamlined permit processes, regional banks with more flexible lending requirements, and accelerated nuclear energy development. Each represents an opportunity for earnings expansion that may not be fully priced into current valuations.

The implications extend beyond quarterly reports. Deregulation historically unleashes what economists call "animal spirits"—encouraging more aggressive business expansion, increased M&A activity, faster innovation cycles, and a renewed entrepreneurial culture. After years where small caps have effectively experienced a "lost decade" of returns, regulatory relief could finally trigger the sector rotation that contrarian investors have anticipated.

This shift wouldn't just benefit portfolios—it might help heal broader societal divides. Many Americans feel the economic system favors large corporations, especially after watching big businesses thrive through COVID while small enterprises struggled. Contrary to popular belief, heavy regulation often reinforces this advantage, making compliance costs proportionally heavier for smaller players.

Are we approaching a multi-year inflection point where market leadership broadens beyond a handful of tech giants? The answer may depend on whether policymakers follow through with meaningful regulatory reform. For investors positioned ahead of this potential shift, the rewards could be substantial.

Connect with guest Michael A. Gayed, CFA on LinkedIn: 
Link: https://www.linkedin.com/in/michael-a-gayed-cfa/

Find Du Charme Wealth Management here:
https://ducharmewealth.com/contact-us/

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[00:00:00] Intro/Tariffs vs Deregulation Debate.
[00:03:05] Impact of Regulation on Companies.
[00:06:40] The Small-Cap Opportunity.
[00:11:40] Deregulation and Market Volatility.
[00:18:20] Banking Sector and Credit Spreads.
[00:24:40] Passive Flows vs Active Management.
[00:29:05] Cultural Impact of Deregulation.


DISCLAIMER:
Information presented on this program is believed to be factual and up-to-date, but we do not guarantee its accuracy, and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the options presented. Encompass More Asset Management LLC is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC) and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.