You might not have noticed, but small cap stocks are actually
leading the market higher. In fact, the Russell 2000 is within
striking distance of its all-time high, while large cap benchmarks
still have a bit more to go before they take out old highs.
The trend towards small caps has become particularly pronounced in
the past three months with the capitalization level clearly beating
out large caps in this time frame. Current performances show
small cap ETFs
gaining about 13.5% in the time period, with
putting up gains of just 8.4% in comparison.
Behind the Surge
There are a couple of reasons for why investors might prefer small
caps at this time including the following:
Higher growth potential-
With the lack of a taper by the Fed, some are taking a more
risk-on stance in the markets, boosting the appeal of pint-sized
securities that have more robust growth opportunities.
Although many international markets are coming back, there is
still a broad perception that the U.S. is the place to be for
equities. Since small caps tend to have less foreign exposure,
many investors have looked to this segment instead of their large
Less of a yield play-
Dividend plays have certainly come back a bit in light of the 'no
taper' announcement, but the outlook for these plays is still
quite uncertain. Small caps aren't exactly known for their income
potential, so undoubtedly this 'growth over income' play has been
some of the reason for the trend towards the space as of
However, some investors are starting to grow concerned by this run
in small caps, thinking that this level of outperformance cannot
continue. PEs are starting to get a little high for the segment
(22.21 forward PE for the S&P 600), while some volatility
thanks to D.C. could result in serious profit taking for small
But what do you think about the small cap outlook?
Do you believe that the small cap rally can continue, or is new
leadership about to take hold of the market?
Let us know in the comments section below!
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