Small caps are crushing the S&P 500: 3 stocks still worth buying

Sector rotation doesn't always mean money moving from sector to sector. In many cases, investors see capital moving from large-cap to small-cap stocks. That's precisely the shift playing out in 2026, and the numbers back it up.

Through July 21, small-cap benchmarks have meaningfully outpaced the S&P 500 over the trailing three months, as investors rotate away from mega-cap concentration risk and into names with more room to run.

With mega-cap tech trading at historically rich valuations after years of AI-driven gains, both institutional and retail investors are hunting for the market's next leg higher. Small-cap stocks, many of which sat out the narrow rally of the past few years, offer that alternative.

But not every small-cap stock deserves a place in your portfolio just because the group is back in favor. Investors still need to separate the names with durable earnings power from those simply riding the wave. Below are three stocks that combine the sector rotation tailwind with company-specific catalysts worth watching heading into the back half of 2026.

UFP Technologies Stock Could Rebound After Earnings Headwinds Ease

UFP Technologies (NASDAQ: UFPT) is a contract development and manufacturing organization that specializes in comprehensive solutions for medical devices, sterile packaging, and other highly engineered custom products. In layman's terms, it's not the name doctors and patients see on the package, but it's a critical part of the medtech supply chain.

In its June 2026 investor presentation, the company forecast that the global medical device market would grow to approximately $518 billion by 2032, with a compound annual growth rate (CAGR) of about 6.3%.

For all the reasons investors may have to go long UFPT, earnings are the headwind. The company's adjusted earnings per share (EPS) in Q1 lagged the revenue gains. Management attributed this to several factors, including its simultaneous product launches.

Those headwinds are expected to abate in the second half of 2026. That will be a key point of emphasis for investors when the company reports its Q2 2026 earnings.

Heading into earnings, UFPT was up 23% over the three months ended July 21, but has dropped about 13% from its 52-week high in early July. That's likely a function of elevated short interest and institutional selling in Q2. The stock is testing its 50-day simple moving average as support.

Willdan Group Benefits From AI Infrastructure and Data Center Growth

The artificial intelligence (AI) infrastructure buildout is facing supply headwinds. In addition to data centers taking time to construct, the need for power must be addressed. That power demand also requires cooling solutions to handle the heat generated.

That's where Willdan Group (NASDAQ: WLDN) comes in. The company provides energy efficiency, infrastructure engineering, and technical consulting services. It's a steady, but not always exciting, business model that's gotten a lift from the demand for data center siting and load forecasting.That, along with its acquisition of Burton Energy Group, contributed to the company raising its full-year 2026 forecast. 

Solid free cash flow is a key metric for any company, particularly for growing small-cap stocks. That's why it's important to note that the company took on debt to fund the Burton acquisition.

However, the company is confident it can pay down the $30 million it drew on its revolver by the end of the year. That could make WLDN a strong asymmetric choice for the second half. The stock is down 29% in 2026, but the consensus price target of $112.67 suggests 55% upside potential.

NWPX Infrastructure Stock Still Has Water Infrastructure Momentum

NWPX Infrastructure (NASDAQ: NWPX)-formerly known as Northwest Pipe Company before its 2025 rebrand-has been one of the standout names in the group, and the chart tells the story: shares are still up sharply over the trailing year even after cooling off from the 52-week high they set in early July.

The water infrastructure manufacturer delivered an 60% earnings surprise in its Q1 2026 report, with earnings per share (EPS) of $1.08 against an estimate for 68 cents and revenue up 19% year-over-year to $138.3 million. Free cash flow jumped more than 20-fold from the prior-year quarter, prompting management to raise its full-year 2026 free cash flow guidance to a range of $50 million to $56 million.

That kind of momentum is exactly why the stock has run so far, so fast-and why it's now digesting those gains. Shares are testing the 50-day simple moving average as support, with the Relative Strength Index sitting in neutral territory near 48. Institutional flows have been mixed following the run-up, a normal pattern after a name more than doubles off its lows.

The consensus price target sits near $110, which is below where shares currently trade-a reminder that analyst targets can lag a stock moving this quickly. With a $430 million backlog and a raised cash flow outlook, the debate now is less about the business and more about how much of that strength is already priced in.

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