“Higher interest rates serve as an ultimate “stress test” for a business by reducing demand while simultaneously increasing borrowing and other costs. Recall that small-mid size companies tend to have limited access to capital and carry higher levels of debt (particularly floating-rate debt) than larger counterparts so they are inherently more vulnerable to higher interest rates.”
Each quarter, Julie Kutasov, Portfolio Manager and Senior Research Analyst, provides an update on the performance of the Small Cap Quality Value strategy and shares her market outlook. Listen to her most recent episode where Julie recaps market activity during 3Q 2026.
Key Insights and Trends
- Small cap value markets declined during the quarter as investors favored balance sheet quality amid rising interest rates and inflationary pressures, while strength in energy and health care contrasted with weakness across several other sectors
- The strategy’s relative performance was impacted by its overweight exposure to industrials, lack of exposure to energy, and lower exposure to health care during a quarter when energy and health care were the benchmark’s only sectors with positive returns
- Higher interest rates may favor self-funding businesses with strong free cash flow and healthy balance sheets, while placing greater pressure on indebted and unprofitable companies within the small cap value universe
- Primary contributors and detractors to the Small Cap Quality Value strategy
Stay Informed with Our Latest Insights
For more insights, read our 3Q 2026 Market Review Commentary or subscribe to KayneCast where we provide the latest updates from the KAR Investment Team on our investment strategies.
KayneCast is available on Apple Podcasts and Spotify.
