The fourth quarter (Q4) 2025 earnings season continued recent trends – with both the Nasdaq-100® Large Cap and S&P 600 Small Cap seeing strong earnings growth. However, looking beyond the title numbers, it is clear thatdriversThe earnings trends among these couldn’t be more different.
Both large and small caps are now seeing strong earnings growth
The Nasdaq-100® reported 17% year-over-year (YoY) earnings growth in the fourth quarter of 2025, extending its remarkable streak to 11 consecutive quarters of 15%+ YoY growth.
The story of small caps has been like a mirror image. The S&P 600 endured 11 consecutive quarters of negative earnings growth from Q3 2022 to Q1 2025. But the situation changed in Q2 2025, when small-cap earnings returned to positive territory, and Q4 marked the third consecutive quarter of positive earnings growth.
Chart 1: Nasdaq-100® on track for more than 15% earnings growth as small caps beat recession
Looking ahead, the consensus estimate is that the Nasdaq-100® will continue its streak of 15%+ earnings growth for the next year and the S&P 600 Small Cap will continue its streak of positive earnings growth.
Although both indices are seeing strong earnings growth today, a look at the drivers of growth over the past few years shows that the similarities end there.
NASDAQ-100® is less sensitive to the headwinds that pushed small caps bearish
Below, we break down earnings growth into three components: earnings before interest and taxes (EBIT) growth (operating performance), interest costs (positive value = falling interest costs), and taxes and other items. Since we’re using trailing twelve months (LTM) data for this analysis, the key earnings numbers differ from the chart above.
The side-by-side comparison is striking.
Chart 2: EBIT growth outweighs other factors for the Nasdaq-100®
Small caps (left chart) have faced many headwinds. Over the past few years, small caps saw negative EBIT growth (green bars) as they faced lower pricing power compared to large caps, as well as margin pressure from higher inflation and wage growth. At the same time, they were dealing with rising interest costs (violet bars) as the Federal Reserve raised rates from 2022-2024.
However, recently, as inflation and wage growth have slowed, EBIT growth has turned positive. This has been helped by the Fed’s rate cuts, which have caused interest costs to stabilize – and they are likely to start falling in the coming quarters.
However, looking at the Nasdaq-100® (right chart), you would think it is operating in a world where these same headwinds do not exist. In fact, these headwinds affected these large caps less because they generally operate with higher margins (so increased input costs have a proportionately smaller impact on EBIT) and they are less labor intensive (meaning faster pay increases matter less).
Additionally, these companies have delivered strong EBIT expansion (green bars) from things like artificial intelligence (AI) infrastructure investments, cloud computing growth, and digital advertising strength. In comparison, interest and taxes have been comparatively negligible.
So, why has the Fed’s rate cycle impacted small caps so much more than large caps?
Small caps rely on floating rate debt, which means the Fed’s moves matter a lot
The reason for this is something we’ve covered in recent years. That is, small caps are more dependent on floating rate debt than large caps. This gives them more information about changes in the fed funds rate.
Chart 3: The Fed’s 2022-2024 rate hike cycle raises small-cap interest rates by nearly 50%
When the Fed started raising rates in March 2022, it raised average small-cap interest rates from 4.7% to 7% by mid-2024 — a nearly 50% increase in borrowing costs in just two years.
As the Fed moves toward rate cuts, small-cap borrowing costs have fallen to 6.6% by the fourth quarter of 2025. While the magnitude of the decline has been modest so far, it is significant as small-cap interest expense currently amounts to 44% of EBIT and further relief is likely in the future, especially if the Fed continues to ease.
However, large caps have greater access to fixed-rate debt, and they were locked in at low rates during Covid for several years. That’s why, throughout the Fed’s hike and cut cycle, Nasdaq-100® interest rates ranged from only 3.5% to 4.4%. Plus, many of these companies actually have large cash reserves.advantageAt higher rates.
As a result, the Fed’s rate hikes have had little impact on large-cap earnings (interest expense is only 9% of EBIT for the Nasdaq-100®).
Strong earnings ahead for large and small caps, but different drivers likely
Although both large- and small-cap indices saw strong earnings growth in 2025, it is clear thatdriversThe earnings trends among these couldn’t be more different.
Nasdaq-100® large caps have benefited from AI spending and long-term fixed rate financing, and their margins remain strong. In contrast, smaller companies are benefiting from falling rates and slower wage growth.
Either way, if analysts are right, we should see strong earnings growth for both in 2026.
