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Equities
A time and place for small cap equities
After handily outperforming both large caps and the broader U.S. equity market for the one-year period following the COVID recession in the spring of 2020, small cap stocks have since lagged, despite posting healthy double-digit gains in two of the past three calendar years. This performance gap reflects in part the narrow but persistent market leadership of a few high-flying mega cap technology companies supported by artificial intelligence (AI) tailwinds.
In the current environment, the odds of a recession are lower as the economy has proven resilient, productivity has improved and easier Fed policy now appears to be closer on the horizon — a plus for cyclical areas of the market like small caps. Based on analyst estimates, earnings are expected to grow faster for smaller than for larger companies.
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Endnotes
Index Performance: FactSet; European Corporate Earnings: I/B/E/S; U.S. Corporate Earnings: Standard & Poor’s; Employment: RBC Global Asset Management; Russell Indexes: FactSet, Russell Investments.
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