2025 outlook: Small caps offer an inexpensive way to gain exposure to the robust US economy. Multiple favorable trends – including onshoring and increased CAPEX – may explain why Wall Street expects to see the strongest earnings gains come from small caps in 2025.
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.
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.
We expect small-cap earnings growth could exceed that of large-cap stocks in 2025, aided by easier earnings comparisons.
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 ...
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.
Short-Term Investor. If you are investing in mutual funds for a short duration, stay away from small-cap mutual funds. Small-cap mutual funds perform well over a long period of time. However, over a short period of time, they tend to be very volatile.
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.
Market experts recommend that investors hold small caps for at least 10 years to benefit and allocate 8% of the portfolio to small caps. But this is entirely subject to the risk appetite and investment goals of the investor.
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.
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%.
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.
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.
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.
Relative to large-cap indices, small-cap P/E multiples look relatively low; they are currently 11% below average (see Exhibit 2). 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.
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.
Managers can offer a long list of reasons small-cap value funds have underperformed. For much of the last 15 years, one challenge has been low interest rates, which tend to benefit growth stocks more than value ones because they make the earnings of growth companies more attractive.
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.
Over the past 11 recessions, small caps have beaten their larger cousins by over 16% during the 12 months after a recession started. Consider the periods before and after the dot-com crash.
Investment Horizon
The recommended time frame is eight to ten years. Making these funds highly suitable for long-term investors.
The main disadvantage of a small-cap fund is its higher risk profile, making it susceptible to market volatility and economic downturns.
After an exceptionally strong December, small caps pulled back modestly in January, falling 3.89% and underperforming large caps by 528 basis points (Russell 2000 versus Russell 1000).