Chuck Royce: Small-caps trailed large-caps, with the Russell 2000 advancing 11.5% versus a gain of 24.5% for the Russell 1000. Curiously, micro-caps fared better than small-caps—the Russell Microcap increased 13.7% in 2024—and mega-caps fared better than large-caps. The Russell Top 50 Index rose 34.2%.
The overall quality of publicly traded small caps has deteriorated, as private sponsors help top performers stay private for longer. Instead of small caps, investors should consider actively adding exposure to U.S. large-cap value and mid-cap growth stocks.
Monthly performance of small caps via the Russell [+] 2000 from December 2023 to November 2024, highlighting the bumpiness that has come after several strong months. In the 12 months ending November 2024, the Russell 2000 had gained 34.6% — outpacing the Dow, S&P 500, and Nasdaq 100.
Small caps rely on loans more than large caps. The higher the interest rate on loans the less companies can make, and from that small caps are going to underperform. The opposite happens when interest rates are going down (and we're not in a recession).
Small caps struggled with a two-year rate hiking cycle that raised their debt financing costs, as well as growing concerns the U.S. was headed for a recession.
However, the highly overstretched valuation of large-cap stocks, together with a few positive developments may shift market participants' preference from large to small-cap stocks. At this stage, we recommend small cap stocks with a favorable Zacks Rank that have strong growth potential for 2025.
Most investors think smaller companies underperform in a recession. In most cases, they are correct. However, what's less well-known is that small caps usually exit recessions quicker than assumed – outperforming large caps. This rebound can begin as early as three months into an economic downturn.
Small-caps are making a comeback in 2024, with the Russell 2000 index up 17% this year, though it still lags the S&P 500.
Small cap mutual funds saw inflows of Rs 34,223 crore in 2024, with a 33% rise in assets under management (AUM). December had the highest inflow of Rs 4,667 crore. Despite frothy valuations, small caps delivered an average return of 26.38%, with Motilal Oswal Small Cap Fund leading at 45.47%.
Small-cap is not a bad thing, it is just that you should have the time-frame. If you're investing for any 10 year, small-cap will beat all other kinds of funds hands down, but if you are coming with a very short-term expectation, you will be very surprised in a very negative way.
While small caps have historically outperformed their large-cap brethren in periods when annual inflation has exceeded 1%, the higher interest rates that come when central banks try to reduce high inflation can be challenging for small companies.
Small-cap funds are riskier than large-cap funds and may not be suitable for everyone. Small-cap companies are more sensitive to market changes and can experience sudden and wide price fluctuations. Small-cap companies are less popular and smaller in size, making their stock less liquid.
Nifty Smallcap 100 index has fallen 4% to its lowest level since mid-June amid concerns about Q3FY25 performance. Disappointing earnings results have led to increased selling pressure, with many stocks down significantly from their 1-year highs and foreign investors pulling out funds.
Looking ahead, S&P 500 stocks are currently forecast to generate 13% EPS growth in 2025 and 13.1% growth in 2026 (versus 8.5% EPS growth in 2025), while the S&P SmallCap 600 Index is currently forecast to generate EPS growth of 20.9% in 2025 and 18.6% EPS growth in 2026 (versus minus 8.0% EPS growth in 2024), according ...
As of October 19, 2024, the small cap index was overvalued at a Price-to-Earnings (P/E) of 33.39, while the 3 year long term average stands at 24.49. But experts think there are certain sectors within the small cap that are fairly valued.
In 2024, we expect to see small-caps rebound, and we believe that the companies that meet our investment criteria – quality businesses with strong balance sheets and sustainable metrics, and undervalued relative to peers or the market – may have a strong year.
We expect earnings to drive the next leg higher for small-cap share prices. Analysts are looking for robust earnings growth: 15% this year, and by over 30% in 2025 and 2026. That is ahead of the long run rate of 13% growth (see Exhibit 3).
It has to do with the great financial crisis and then the pandemic, quantitative easing. The low interest rates, the deficits, and obviously in the extreme case when the pandemic hit, we had aggressive monetary easing as well as fiscal stimulus.
In a recession, it's smart to preserve your capital by investing in safer assets, such as bonds, particularly government bonds, which can perform well during economic downturns.
We expect small-cap earnings growth could exceed that of large-cap stocks in 2025, aided by easier earnings comparisons.
With small-cap mutual funds, always opt to invest for the long Term. Therefore, the minimum period for which you should be investing in small-cap mutual funds is 5-6 years. As mentioned earlier, small-cap mutual funds tend to be very volatile. For example, they may go up and down in the short Term.
The future outlook for mid-cap and small-cap funds is cautiously optimistic. With India's GDP expected to grow at 6.5%-7% in FY 2025-26, sectors represented in under the mid and small cap indices are poised for expansion.
On average, small-caps have an advantage when the U.S. economy is in recovery mode. It's typically a great time to invest in small-cap stocks when the economy is rebounding, unemployment rates are decreasing quickly, and businesses are seeing strong earnings growth. Of course, small-cap stocks don't always outperform.