UK Small Cap Stocks Set for a Strong Year Says Analyst

UK small-cap stocks could be poised for a strong 2026 as interest rate cuts, steady corporate performance and ongoing takeover activity support valuations, according to Shore Capital analyst Rob Sanders.

Sanders said in a recent note that global indices ended 2025 near record highs, helped by monetary easing from the Federal Reserve and the Bank of England.

He reiterated the firm’s long-held view that “UK equities respond well to interest rate cuts” and noted that further reductions are expected this year.

Despite gains across the market in 2025, Sanders believes smaller UK companies “generally remain unloved and undervalued,” even as most firms continue to meet or beat earnings expectations.

He highlighted that the FTSE 100 significantly outperformed mid- and small-cap indices last year, though all major UK benchmarks finished in positive territory.

M&A activity remained a key feature of the market, with takeover premiums reinforcing what Sanders described as the “relative value of UK equities.” He noted that new bids and approaches continued through December, adding further support to smaller companies.

Shore Capital recently hosted a conference featuring leading small-cap fund managers, where Sanders said the consensus showed that “the smaller end of the UK equities market provides some compelling investment opportunities.”

He added that potential earnings upgrades and re-ratings in 2026 could help close the valuation gap.

Interest rate cuts remain central to the outlook. With the Bank of England lowering rates to 3.75% in December, Sanders stated that falling borrowing costs could provide “significant support for the equity market.”

He concluded that any meaningful inflows into small caps “would lead to an excellent year for investors.”