Overview
Jefferies says a recent jump in oil prices and a growing divergence in earnings expectations have eroded what had been a clearer case for small- and mid-cap (SMID) stocks to outperform large-caps heading into the first-quarter earnings season. The broker's earlier baseline expected above-average earnings growth across market-cap segments, with a steeper improvement for companies further down the market-cap ladder - a view that has shifted as commodity and geopolitical dynamics have changed.
Consensus revisions and headline numbers
Current consensus estimates show 2026 earnings growth for small-cap companies at just under 12%. Mid-cap forecasts sit at 12.8%, a level that has been roughly unchanged over the past eight weeks. By contrast, the large-cap earnings-growth projection has risen to 15.5%, marking its highest reading so far this year.
Strategist Steven DeSanctis described the market's reaction to rising energy prices in a note, saying: "With oil prices surging and staying higher for longer than investors expected, the market has moved back to a more concentrated state, with fewer names beating expectations." He also noted that the war in Iran has added to uncertainty, even though analysts have not yet adjusted their estimates in response.
Revision trends
For now, revision metrics remain relatively stable. Jefferies reports that both earnings and sales revision ratios are close to 1.0, and that the rolling three-month figure has been above that level for the seventh consecutive month. DeSanctis attributed much of this ratio behavior to Energy, while highlighting that Discretionary and Financials have held up. Tech and Industrials have seen declines in their ratios.
Q4 recap and earnings dynamics
During the fourth-quarter reporting cycle, small-caps delivered earnings growth of roughly 9%, trailing large-caps, which posted about 13.2% growth. That result interrupted a one-quarter run in which small-caps had outperformed. Beat rates for both size segments were slightly under the long-run average.
Jefferies' analysis of market reactions found an asymmetry in how investors treated surprises among large-cap companies. When large-cap firms missed earnings estimates, they were not meaningfully punished - excess returns remained positive across all the timeframes examined. Conversely, large-cap companies that beat expectations produced stronger-than-average alpha, with the divergence widening over a 20-day window, according to DeSanctis.
Sector composition within SMID
On sector mix, Jefferies finds the small- and mid-cap profit pools still comfortably positioned for now. Financials represent roughly 25-28% of profits in both the small- and mid-cap universes, and are projected to post growth of 14.8% for one cohort and 9.5% for the other. Tech, Industrials, and Materials together comprise about another third of earnings in those groups. Consumer-oriented sectors - which face greater exposure to higher energy costs - account for less than 20% of profits across both SMID segments.
Looking ahead
Jefferies highlights the risk clustered in the second half of the year. Street forecasts assume a marked acceleration in small- and mid-cap earnings growth in the third and fourth quarters, a pattern DeSanctis says has failed to materialize in recent years. That reliance on back-loaded improvement presents a vulnerability if expected momentum does not occur.
Bottom line
Rising oil prices and geopolitical uncertainty have shifted the earnings-growth narrative toward large-caps for now, trimming the relative advantage for smaller companies as Q1 reporting begins. Revision ratios and sector composition remain informative, with Energy and Financials notable drivers. Jefferies cautions that the market's expectations for late-year acceleration in SMID earnings are a central concern if the anticipated lift does not arrive.