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Small Caps Poised to Outperform

29 March 2019

Currently in the U.S. it appears that smaller capitalization stocks may be positioned for higher returns than their larger counterparts. As fundamentals and valuation both seem to be aligned, small caps may be able to reverse a multiyear period of underperformance.

Small Caps Are Growing Faster than Large Caps

Over the next two years, small cap earnings per share growth is forecasted to double that of large caps. This would be a significant change from the past several years when the earnings growth of small caps and large caps were similar. (In spite of this, small caps underperformed during the past few years due possibly to investor pessimism driven by recessionary fears.)

  • Additionally, given the faster economic growth of the U.S. compared to the rest of the developed world, small caps’ greater domestic exposure relative to large caps (79% vs. 64%) may be an advantage.
  • Small cap stocks are also attractively valued when one compares the price-to-earnings (P/E) multiple of the Russell 1000 and Russell 2000 indexes; the P/E multiple premium of the Russell 2000 index relative to the Russell 1000 is the lowest it has been in a decade.1
  • In contrast to the past few years, small cap stocks have historically tended to outperform large cap stocks (see Alger On the Money “Looking for Higher Returns?”).

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