Although slowed by a volatile and bearish finish, small-cap stocks, as measured by the Russell 2000 Index, finished 2024 with a second consecutive positive quarter, gaining 0.3% in 4Q24.
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.
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.
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.
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.
Large-cap stocks are ideal for risk-averse investors, while mid-cap and small-cap stocks suit those comfortable with higher risks. Determine allocation: A balanced portfolio could have 50% in large-cap, 30% in mid-cap, and 20% in small-cap stocks, but adjust this based on your investment goals.
High risk: While small-cap companies have a lot of growth potential, they have equal potential to fail. Small-cap stocks are a riskier investment than large-cap stocks. The companies usually have less access to investment capital and are more sensitive to market changes. This makes them a riskier investment.
If you have a greater risk tolerance and longer time horizons, small-cap stocks tend to outperform big-caps over time because they are able to grow more rapidly than larger companies. If you prefer stable appreciation and dividend income, big-caps may be more suitable.
Rebound Potential: The initiation of rate cuts by central banks, signalling a move towards a more normalised interest rate environment, could reduce the performance gap between small and large cap stocks. This environment may favour small cap stocks, indicating a potential rebound.
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 ...
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.
However, historical evidence shows that small caps outperform large caps over time, particularly following periods of underperformance and economic recovery. As market dynamics evolve going into 2025, we are on the cusp of such a shift, where small caps are poised to take centre stage.
We expect small-cap earnings growth could exceed that of large-cap stocks in 2025, aided by easier earnings comparisons.
Historically, small caps tend to excel in the final two months of the year, with November's impressive gains often rolling into December as part of the so-called “Santa Rally.”
To find an appropriate investment mix for your time horizon, find your age and the corresponding portfolio allocation. A typical mixture could include 60% large-cap (established companies), 20% mid-cap/small-cap (small to medium-sized compa- nies), and 20% international (companies outside the U.S.) stocks.
Outlook. Large cap growth as a category has continued to deliver outstanding performance in 2024, extending a trend that has been in place over the last five years. The Russell 1000 Growth Index is on pace to be up over 30% this year, a trajectory that's not going to continue every year.
Large-cap funds are less risky than small and mid-cap funds. Small and mid-cap funds have higher growth potential than large-cap funds. Large-cap funds are good for conservative investors.
In July 2024, U.S. small-cap stocks outperformed large-cap stocks after lagging for the first half of the year, driven by a cooler inflation report and improved market sentiment.
Kotak Small Cap Fund and Axis Small Cap Fund gave 29.08% and 28.43% returns respectively in 2024. Quant Small Cap Fund offered a 28.34% return in the mentioned period. Franklin India Smaller Cos Fund gave a 26.31% return in the said period.
Large-cap Funds aim to provide steady returns over the long-term and are considered relatively less risky than the Mid-cap and Small-cap Funds. Mid-cap Funds, on the other hand, invest in stocks of companies with medium-sized market capitalisations.
Small-cap funds have the potential to generate higher returns with High Risk, but at the same time, they include higher risk than mid-cap and large-cap funds. If you do not mind taking a higher risk and want to invest long-term, you can choose small-cap mutual funds.
If you are a first-time investor. These stocks are easily discoverable, stable, and comparatively low-risk than mid-cap and small-cap shares. If you want to earn a steady income from your investment, you can consider buying large-cap stocks that pay regular dividends.