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-cap valuations – Attractive
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).
Small-cap funds have enjoyed a record run in the past five years. The category has fetched 31% annualised returns, compared to 16% from large-cap funds. Investors continue to bet heavily on this space. Since 2019-20, the total inflow in small-cap funds has crossed Rs.1 lakh crore.
Market Performance Trends May Benefit Small-Cap Stocks
Indeed, NVIDIA and the other Mag 7 stocks accounted for 100% of the S&P 500® Index's earnings growth from mid-2023 through the first quarter of 2024. Estimates from Wall Street analysts show us that the earnings growth tide may turn in the second half of 2024.
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.
But analysts and investors are increasingly optimistic about small-caps' potential to outperform large-caps in the months ahead, driven by the likelihood that the U.S. won't fall into a recession and that interest rates will fall by as much as 1.5 percentage points by the end of 2025, says Sam Stovall, chief investment ...
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.
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%.
Hence, you may incur losses if you wish to withdraw or redeem your investment from the said small-cap mutual fund. Of course, that is not to say that gains cannot be made, but the risk always looms. That's why it always pays to stay invested in a small-cap fund for at least five to six years.
Small-Cap Stocks Outlook for 2025
Lee pointed out that 2025 is going to be a good year for small and mid-cap stocks. Backed by interest rate cuts and the incoming administration, companies are going to be expansionary and feel confident about mergers, added Lee.
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.
Given the changing macroeconomic backdrop, we outline why we see potential value for investors in small caps in 2024. The consensus is that interest rates look to have peaked, with markets now pricing in cuts across many major economies in 2024, something which could prove beneficial to small caps.
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 ...
Not only have small-cap stocks historically outperformed their larger peers, but they've done so strongly, by an annual average of more than 300 basis points (bps), and consistently, more than 69% of the time (Figure 1).
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.
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.
The small cap segment can be extremely volatile in the short term, but they have the potential to offer very high returns over a long period. Small cap schemes are recommended only to aggressive investors with a high-risk appetite and long investment horizon, say, around seven to 10 years.
Investing in small caps during recessions has generated superior investment returns, according to our back-testing of the data to the late 1980s (see Table 1, below).
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.
The Federal Reserve's interest rate cuts are another reason why small-cap stocks are well-positioned for growth in 2025. Small-cap companies tend to be more reliant on borrowed money, and falling interest rates make it cheaper for these companies to take on debt.
Small-cap mutual funds perform well over a long period of time i:e over a period of 10yrs and above. However, over a short period of time, they tend to be very volatile, and you can hardly get any return or else even negative return.
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.