Barron's Streetwise — Episode Summary

Episode Title: Small Cap Earnings Could Jump 20%. Plus, a Beer Mystery.
Host: Jack Howe (Barron's columnist)
Guest: Jill Carey Hall (BofA Securities, Small Cap Strategist)
Producer: Alexis Moore
Release Date: January 9, 2026

Main Theme

This episode delves into two key topics:

1. The underperformance and prospective resurgence of small-cap stocks, with a focus on potential 20% earnings growth in 2026, as explained by BofA's Jill Carey Hall.
2. A "beer mystery" centered on why Constellation Brands' flagship Mexican beer sales (Modelo and Corona) have slumped, exploring the roles of immigration, economics, and market cycles.

Key Discussion Points & Insights

1. The Beer Mystery: Constellation Brands and Mexican Beer Sales

Segment: 03:00–13:15

• Background & Outperformance

  • Constellation Brands rode the Hispanic demographic and savvy marketing (e.g., canned beer) to outperform the S&P 500 and other brewers for nearly a decade.
  • "If you look at the decade that ran through 2022, investors who held Constellation stock made 22% a year, versus 13% for the S&P 500..." (05:33, Jack Howe)

• Recent Downturn

  • In the year before last week’s earnings, Constellation stock lost a third of its value.
  • Sales declines noted: depletions down 4% for Modelo, 9% for Corona, partly offset by smaller brands, resulting in an overall beer business drop of 2.2%.

• Theories for Slumping Sales

  1. Market Saturation

     • "One theory is simply that Constellation has tapped its growth opportunity with Modelo. Maybe it now looks like other big brewers." (09:33)
     • But management notes its beers have 20% less distribution than industry heavyweights, indicating room for growth.

  2. Stock Overvaluation ("priced for perfection")

     • Valuation multiples dropped from high 20s to under 13 times earnings.

  3. Economic & Immigration Headwinds

     • Management-reported Hispanic customers worry about food, gas prices, job loss, and immigration issues, affecting social gatherings—key occasions for beer sales.
     • Quote from CEO (Bill Newlands): “2/3 of its Hispanic customers were concerned about higher prices on food, gas and other essentials. And about half of them were concerned about immigration issues.” (11:01)

  4. ICE Immigration Raids Impact

     • Social gathering anxiety from immigration enforcement could reduce sales.
     • "If these high profile ICE raids... if they began roughly a year ago... and if they matter a lot for beer sales... whatever percentage decline may have been caused by immigration fears, that percentage decline might go away once the bar is reset lower..." (07:25)

• Wall Street "Lapping" Logic

  • Analysts expect the anniversary of negative events (like ICE raids) may mark a bottom in comparison, setting the stage for renewed growth.
  • Barclays remains skeptical: "[Barclays] calls this immigration raid thesis for Constellation stock a trading idea, but not really a long term reason to hold the stock." (12:54)

• Management’s Latest Clues

  • Tracking by zip code: >20% Hispanic zip codes still face challenges; some improvement seen where Hispanic population is lower (<20%).
  • "It still remains very challenging. But...has seen some improvement in zip codes with less than 20% Hispanic representation." (12:34, Jack paraphrasing CEO)

Memorable Moment

• “Wall Street called the results good enough. Considering that the case for shares rests on a future return to normal conditions, there are some other things to look forward to. There's a World Cup of soccer coming this summer... that’s got to help beer sales.” (10:59, Jack Howe)

2. The Small Cap Opportunity: 2026 Recovery

Segment: 13:45–25:30

• Historical Underperformance and Potential Cycle

  • Small caps have underperformed large caps for over 10 years, longer than the usual 6-8 year cycle.
  • "Usually these cycles for small caps versus large caps tend to run about six to eight years... Small caps have been underperforming for over 10 years now. So historically speaking, we’re due for an outperformance cycle for small caps." (15:34, Jill Carey Hall)

• Earnings Recovery in Sight

  • Small caps were in an "earnings recession" longer than large caps.
  • Difference explained by sensitivity to manufacturing sector (struggled to recover) and higher percentage of non-profitable companies in small-cap indices.
  • “You’ve had an increasing proportion of stocks in the Russell 2000 that are non-earners, non-profitable stocks. So in an earnings recession, a lot of these stocks struggled even more.” (17:20, Jill Carey Hall)

• 2026 Forecasts

  • Analysts project nearly 20% earnings growth for small caps vs. 13% for large caps in 2026.
  • Historically, when small cap earnings outpace large caps, small caps outperform 75% of the time.
  • "So right now analysts are penciling in close to 20% earnings growth for small caps this year... 13% is what's penciled in right now for large caps." (18:27–18:42, Jill Carey Hall)
  • “When we looked at periods where we saw that in the past, we saw that small caps tend to outperform in those periods about 75% of the time.” (20:40, Jill Carey Hall)

• Interest Rate Sensitivity

  • Small caps benefit more from Fed rate cuts due to higher leverage and more short-term/floating rate debt compared to the more stable, long-term debt structures of large caps.
  • “They have a lot more debt, they have a lot more leverage... large companies were able to clean up their balance sheets…” (19:45, Jill Carey Hall)

• How to Invest (ETFs, Indexes, Sectors)

  • S&P 600 vs. Russell 2000: S&P 600 is higher quality since it has an earnings test; Russell 2000 is broader but includes more unprofitable firms.
    • "That's the one where I think of it as more of a wild west. There's a lot of companies in there that maybe they don't make any money. Whereas the S&P 600... tends to be more profitable companies." (22:18, Jack Howe)
  • Value vs. Growth: In years of broad profit growth, value stocks within small caps often outperform growth. Current valuations favor small cap value.

• Strategist's Picks (BofA Top SMID Cap Picks for 2026)

  • 10 highlighted picks (with tickers):
    • Birkenstock (BIRK)
    • Duolingo (DUOL)
    • Wayfair (W)
    • Elf Beauty (ELF)
    • Vita Coco (COCO)
    • Alaska Air (ALK)
    • Knight-Swift Transportation Holdings (KNX)
    • Renaissance Re (RNR)
    • Southwest Gas Holdings (SWX)
    • Guardant Health (GH)

Memorable Quotes

• “We are looking for an earnings recovery for small caps... and you’re finally seeing companies guiding that way.” (17:49, Jill Carey Hall)
• “I do think that small caps overall will outperform large caps this year...” (21:52, Jill Carey Hall)
• "I promised some top mid cap picks from BofA for 2026. They published a list this past week. I'm going to name 10 of them." (24:07, Jack Howe)

Notable Quotes & Moments with Timestamps

• On Wall Street optimism as a contrarian signal:

  • “It feels like Every investor right now is sitting in the same chat room online talking about what the new hot thing is that they're all going to pile money into. So it will be interesting to see if small caps really do become, you know, go from being so out of favor to become into being the, the hot new thing.” (21:06, Jack Howe)

• On feedback and scientific accuracy:

  • “I strayed from what I should have said about uranium... I said some scandalous things about uranium.” (01:20, Jack Howe)
  • “You said that uranium 235 and 238 have a different number of electrons when in actuality they have the same number of electrons and protons but a different number of neutrons...” (01:28, Alexis Moore)

Timestamps for Key Segments

• 00:28 — Introduction; correction on uranium science
• 03:00–13:15 — Constellation Brands, the beer mystery, and Wall Street logic
• 13:45–25:30 — Jill Carey Hall on small caps: background, forecasts, investment advice, stock picks

Episode Flow and Tone

• Tone: Conversational, slightly playful (e.g., back-and-forth banter about science corrections, "hairy big toe company" for Birkenstock), but remains focused on delivering serious, well-sourced financial analysis.
• Jack is forthright about past errors and thorough in explaining Wall Street's often counterintuitive logic, such as "lapping" negative events.
• The Jill Carey Hall interview is analytical, candid about forecasting uncertainties, and packed with practical investing advice.

Summary — Key Takeaways

• Beer Mystery: Constellation’s beer sales slumped due to a blend of headwinds—market saturation, stock overvaluation, economic pressures, and immigration fears. Wall Street is looking for a rebound as it "laps" last year’s headwinds, but opinions vary about how much improvement is ahead.
• Small Cap Outlook: After a decade of lagging performance, small caps are poised for a 2026 comeback, with almost 20% earnings growth forecasted—potentially setting up major outperformance versus large caps. Interest rates, index selection, and value-vs-growth positioning are crucial, and BofA offers specific picks for those seeking ideas.

For listeners:
If you’re invested in beer stocks, pay attention to demographic and macro shifts—Wall Street logic can be paradoxical. If you’ve been ignoring small caps for years, 2026 could be the year to look again, especially at quality and value plays.