Small-Cap Stocks: A Promising Future Amid Market Volatility

Small-cap stocks are forecasted for significant growth. Analysts predict a shift in performance dynamics, favoring small-cap stocks due to favorable interest rates and valuation, creating investment opportunities according to expert opinions.

Date: 15-03-2025

AI Rating: 5

**Investment Outlook for Small-Cap Stocks**
The report discusses the contrasting performance of small-cap stocks, represented by the Russell 2000 index, compared to large-cap stocks in the S&P 500. Tom Lee's suggestion of a potential 100% outperformance by small-cap stocks has not yet materialized, as the Russell 2000 has declined 16% since the prediction while the S&P 500 has seen a lesser decline of 8%.

**Market Dynamics**
The Federal Reserve's recent interest rate cuts are expected to disproportionately benefit small-cap companies, as they often hold more floating-rate debt. Historically, the Russell 2000 saw an average return of 45% in the year following the last five rate cuts, while the S&P 500 recorded a 33% return in the same time period. Small-cap stocks currently trade at 16 times earnings, with earnings growth projected at 11.5%. Conversely, the S&P 500 trades at a higher 22 times earnings, with a forecasted growth rate of 9.4%. The appeal of small-cap stocks is reinforced by their relatively low price/earnings-to-growth (PEG) ratio of 1.4 compared to the S&P 500's PEG of 2.3.

**Less Global Exposure**
Additionally, small-cap companies depend less on international sales (20%) versus their large-cap counterparts (50%), making them less vulnerable to global economic fluctuations, such as retaliatory tariffs and the effects of a stronger U.S. dollar.

**Conclusion**
The report concludes by emphasizing the Vanguard Russell 2000 ETF as a strong option to gain exposure to small-cap stocks amidst prevailing low interest rates, attractive valuations, and potential outperformance in the upcoming years. Nonetheless, the historical dominance of large-cap over small-cap stocks suggests caution for investors opting to diversify their portfolios.

Stocks: ^GSPC NASDAQ:VTWO