Small- & Mid-Cap Stocks Gain Momentum
Market leadership is beginning to broaden beyond the Magnificent 7, and down-cap equities, both mid- and small-cap stocks, are providing great opportunities for investors looking to diversify concentrated, large-cap growth positions. Down-cap equities are currently undervalued relative to large-cap stocks and generally under-owned within portfolios, meaning these segments of the market have both tremendous potential and ample runway to outperform. But most importantly, the chart¹ above shows that small- and mid-cap stocks are finally delivering on the most critical driver of stock market returns – earnings growth. Earnings growth revisions for down-cap stocks have been consistently positive and meaningfully stronger than revisions for large-caps, leading small and mid-cap stocks to outperform. Year-to-date, the Russell 2000 Small-Cap Index (0.14%), the Russell 2500 Smid-Cap Index (1.07%), and the Russell Midcap Index (0.85%) are all positive, despite the market volatility in response to the Iran conflict and the spike in oil prices, while large-cap stocks, as measured by the S&P 500 (-2.86%), the Dow Jones (-2.75%), or the NASDAQ (-4.77%), are solidly negative.
Ironically, small companies make up the vast majority of businesses in the U.S., account for an outsized portion of recent job growth, and, if measured collectively, would be the single largest employer in the country, but are significantly underrepresented within investor portfolios.² Solid economic growth, interest rate cut expectations, and an improving regulatory environment with the One Big Beautiful Bill Act (OBBBA) together create favorable conditions for down-cap equities. Strongly positive recent earnings growth revisions indicate that small companies are responding and excelling in the current environment and may be poised for a good stretch of outperformance looking forward.
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1 Smid-cap stocks gain momentum as market broadens | Capital Group
2 What role do small businesses play in the US economy? | USAFacts
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