Small-Cap Stocks May Gain Traction Post Fed Rate Decisions

Despite a slight decline in the stock market following the Federal Reserve's interest rate decision, the S&P 500 and Nasdaq remain close to all-time highs. The report suggests potential for small-cap stocks to outperform in 2025 as interest rates may fall, countering the recent market turbulence.

Date: 27-12-2024

AI Rating: 7

The report details the recent performance of indices, indicating that while the overall market and major benchmarks like the S&P 500 and Nasdaq are performing well, small-cap stocks have faced challenges, particularly with the Russell 2000 index down almost 9% from recent highs. The expectation is that small-cap stocks may see a resurgence in 2025, particularly if interest rates fall.

Market Performance

The report illustrates a clear valuation disparity between small-cap stocks and large-cap stocks, emphasizing that the Russell 2000 has significantly underperformed compared to the S&P 500. As of December 23, the report indicates a total return of 26% for the S&P 500 versus just 12% for the Russell 2000—highlighting the 14 percentage points of outperformance from large-cap stocks.

Potential Catalysts

The anticipated decline in interest rates could serve as a major catalyst for small-cap stocks, as these companies typically depend more on borrowing. Lower rates would reduce borrowing costs, potentially leading to better margins and overall profitability for these companies. Furthermore, with risk-free investments becoming less appealing, more capital could be funneled into the riskier small-cap stocks.

Market Outlook

The report discusses how a favorable economic environment created by an incoming administration may also benefit smaller companies through lower taxes and reduced regulations. This could further enhance competitiveness for small-cap stocks against their larger counterparts, creating a compelling narrative for investors looking at the small-cap sector.

Conclusion

Given the substantial valuation gap, the report encourages investors to consider small-cap equities for long-term positioning. The data suggests that while immediate performance may still be sluggish, the structural changes anticipated in the economic landscape could lead to significant gains down the line.

Stocks: VTWO