Happy New Year folks!
I hope you enjoyed the holidays with friends and loved ones and are ready to begin 2025 on strong footing.
I know I am…
Regular readers know that I’ve been preparing for this year for some time.
I believe 2025 is setting up to be the year of small-caps stock.
At its December 6 high, the S&P 500 was up nearly 29%. But not all stocks enjoyed such outsized gains last year.
Despite various attempts to rally, small caps lagged their larger counterparts in 2024.
As you can see in the chart below, small caps – as measured by the iShares Core S&P Small-Cap ETF (IJR) – returned less than half of what the S&P 500 did over the last two years. The iShares Micro-Cap ETF (IWC) has underperformed by even more.
But the above picture is just a two-year snapshot. The long-term outlook for small caps remains bullish…
Take a look at the chart below, which shows small-cap stocks’ performance since the iShares Core Small-Cap ETF was launched in mid-2000. Smaller stocks have greatly outperformed the S&P 500 over that 20-plus year time frame.
That makes now the right time to be overweight small caps.
Here’s why…
Innovation: We’re entering a period where innovations ranging from artificial intelligence (AI) to genomics, self-driving cars, and quantum computing are becoming reality. Small companies are often on the cutting edge of innovation. And that means they’re positioned to become the leaders of the next great technological breakthroughs.
Interest rates: Rates have been moving higher recently, but the Federal Reserve plans to continue its rate cutting cycle this year. This will lead to lower rates over time – which is bullish for small companies that often rely on borrowing money during their early growth stages.
Valuations: Small caps are undervalued both on a historical basis and versus their large-cap peers. The forward price-to-earnings (P/E) ratio of the S&P SmallCap 600 Index was 12.6 at the end of November. That’s only the second time it has been below 13 since 2000. Meanwhile, the S&P 500’s forward P/E ratio is 24.1.
However, when you consider that small caps’ growth potential typically exceeds that of larger companies, it’s clear that their valuations should be higher.
Recent performance: As I mentioned, small caps have underperformed in recent years. But I’m confident there will be a reversion to the mean – and that they’ll lead the next bull market.
There are several ways to play this trend…
If you have a retirement account with only funds available, there should be some small-cap options to choose from. But your options are even greater if you’re looking to invest in individual stocks.
As you likely know, small caps are the sole focus of my Early Opportunities Report investment newsletter. My team and I scour the market daily to uncover “hidden gems” before Wall Street and the mainstream media have even heard their names.
By investing in these companies early, we stand to make massive gains as these companies grow from obscurity to household-name status.
This is an area of the market I’m passionate about. And I firmly believe every diversified portfolio should have some exposure to small caps – especially as they set up to outperform their larger peers this year.
If you agree – or if you simply want to learn more about our strategy of investing in small, innovative companies early – I encourage you to click here for more information.
Here’s to the future,
Matt McCallEditor, Market Insights
The post Small Caps: Positioned for a Comeback appeared first on Centurion Publishing.
