Morningstar Is Overweight Small Caps and Latin America: Here’s Why

The Russell 2000 Index has skyrocketed this year, climbing 22% year to date through June to trounce the Big Tech-dominated large-cap universe represented by the S&P 500, up about 10%. Morningstar’s overweight in small caps is certainly paying off this year. In an interview with Hedge Fund Alpha following the 2026 Morningstar Investment Conference, Dominic Pappalardo of Morningstar Wealth shared the advantages of investing in small caps and explained why they like Latin America the most out of all emerging markets.

The onslaught of Big Tech bonds

Both Big Tech and the U.S. government are borrowing heavily, but for different reasons. As Big Tech borrows more and more, corporate tech bonds are starting to command a massive share of the marketplace. Thus, multi-asset investors must balance the credit risk of tech infrastructure against the structural, long-term risk of a $39 trillion U.S. federal deficit.

For Pappalardo and Morningstar Wealth, the impacts of the onslaught of tech-related bond issuances are not alarming. He does think investors should be paying attention to this, and he feels that it looks like the initial impact is creating some concentration risk in the corporate bond market that hasn’t existed previously.

“Those tech companies are now making up a larger and larger share of the outstanding corporate bond market,” Pappalardo said. “So anyone that’s tracking a corporate bond index, the share of tech names, the weighting of tech names in those indices is increasing as more and more bonds are issued. That’s not concerning because those are still, at least at this point, very high-quality companies in our view. So they have very strong balance sheets. Fundamental strength has been improving, actually, throughout the AI investment cycle, which I suppose isn’t really surprising. At some point, that could start to become concerning if the debt issuance keeps compounding upon itself, or if we see some of these AI investments not pay off the way that they’re projected to.”