A healthy economy, cheap small-cap valuations, and interest rate cuts will prove a formidable catalyst for small company stocks.
When we headed into 2024, many pundits predicted that the year would be good for small-caps. Following the dominance of the “Magnificent 7” in 2023 which lifted large-caps to record highs, it was quite unlikely that large companies would continue along a similar trajectory in 2024. Small-caps, the experts said, had underperformed as a class for many years, their stocks are cheap, and the economy is healthy. Soon, small-caps would shine.
Now, a third of the way through 2024, small company stocks still lag their larger brethren despite a promising start to the year. A recent article published on Morningstar.com even asked, "Will Small-Cap Stocks Ever Catch Up?" (Spoiler alert: Yes, they most certainly will.)
The outlook for interest rates is, of course, a key inhibiting factor to small-cap performance. The consensus that rates will be higher for longer has tempered enthusiasm for small stocks, and the fact that mega-caps like Nvidia and Microsoft continue to deliver outsized earnings growth is keeping investors harnessed to larger company stocks.
Adoration of large-caps will end, eventually, and small-caps—especially those of high-quality companies like those covered in the SmallCap Informer—will move from the backseat to take the wheel once again. The combination of a healthy economy, cheap small-cap valuations, and cuts in interest rates will likely prove a formidable catalyst for small company stock performance.
Of course, this assumption begs the question, “When?” Bull and bear markets are never announced in advance, so savvy investors know that they must maintain exposure to small-caps during all market cycles. With small-company stock valuations at attractive levels, this may be a good time to pick up a few bargains, as well.
Our focus stock in the May 2024 issue of the SmallCap Informer is a return to a past selection that has delivered positive results for subscribers, but remains undervalued when compared to its past valuation levels. Now may be a great time to load up on shares!
Stay the course!
Subscribers can read Doug's complete commentary and the in-depth profile of our recommended small company stock in the May 2024 issue of the SmallCap Informer stock newsletter. Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 47 high-quality small company stocks currently covered in the newsletter.