Small-cap tech stocks surge as AI frenzy spreads beyond megacaps

U.S. small-cap technology stocks have surged, with the S&P 600 small-cap tech index gaining nearly 54% this year through May 27, far outpacing the S&P 500 tech index's 20.1% rise, as investors rotate into smaller firms seen benefiting from the artificial intelligence buildout. The Invesco S&P SmallCap Information Tech ETF attracted $49.7 million in inflows this year, reversing four consecutive years of outflows, according to LSEG Lipper data. "The AI trade has broadened quite materially," said Oren Shiran, portfolio manager for the Lazard US Systematic Small Cap Equity ETF, noting small-caps have become "a real part of the second and third order of AI." Despite the rally, some analysts warn gains may be speculation-driven rather than fundamental. Los Angeles Capital Management's Hal Reynolds said price moves reflect speculation, not changes in fundamentals relative to large-caps. Small-cap semiconductor firms such as MaxLinear and VIAVI have posted triple-digit gains, yet their past profitability has been inconsistent, with both companies swinging between quarterly profits and losses.