After years of trailing their large-cap peers, small-cap stocks have tested the patience of even seasoned investors. But we believe a dramatic improvement in earnings growth driven by lasting change in the US economy is creating sustainable recovery potential for small companies of all types.
Small-cap companies are usually the most vulnerable to volatility, with their stock prices and earnings getting hit particularly hard and early in economic downturns, much like what occurred in 2022. Yet they also tend to lead the way on both fronts during recoveries.
Small-cap stocks were hit harder than large-caps in the coronavirus sell-off. But given the extreme market dislocations, select smaller companies with innovative advantages could offer investors a surprising source of diversification for the uncertain times ahead.
As trade tensions escalate, investors are flocking to stocks of smaller US companies, which rely less on foreign sales than their large-cap peers. But in some industries, tariffs could affect smaller companies in unexpected ways.
Though the “Trump bump” helped, the year-old winning streak in smaller stocks owes far more to the spirited US economy. This rally has firepower, but we’d be choosy in riding the next leg higher.
