We expect small-cap earnings growth could exceed that of large-cap stocks in 2025, aided by easier earnings comparisons.
The small-cap funds saw an average return of 25.69% from December 2023 to December 2024, while mid-cap and large-cap funds yielded returns of 26.91% and 14.97% during the same period. So far, the Sensex has gained 8.92% and the Nifty has risen 9.49% in 2024.
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 ...
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.
In particular, consider the remarkable gains in the S&P 500 Index, which was on track to close up more than 25% for 2024, well ahead of Wall Street analysts' forecasts, in one of its strongest annual performances of the last quarter-century.
Small-cap mutual funds are ideal for you if you have an investment horizon of five years and above, as small-cap stocks are volatile in the short term, and small-cap funds perform better in the long term.
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.
The underperformance of small caps in 2021 was driven by poor returns of small growth companies with low profits. These companies have underperformed historically. An approach that excludes small growth stocks with low profits may increase returns.
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.
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.
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.
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).
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.
Filter. Small Cap Fund : These mutual funds select stocks for investment from the small cap category, which includes all stocks except largest 250 stocks (by market capitalization). Suitable For : Investors who are looking to invest money for at least 3-4 years and looking for very high returns.
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.
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.
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.
As shown below, the S&P 500 was up more than 23% in 2024, bested by both the Nasdaq (up nearly 29%) and the Nasdaq 100 (up nearly 25%). Those gains were boosted by the Magnificent 7 group of stocks (up nearly 67%) along with a handful of other mega-cap stocks (more on that below).