Small-cap stocks are expected to benefit from the Trump administration’s deregulation and tax cuts.
Regulation and taxes are more burdensome on smaller companies. Small-cap stocks, however, have not been able do well in recent months.
But things could change in the future. According to Rob Ginsberg of Wolfe Research, US small-caps are well positioned for an upcoming rally.
Why haven’t small-cap stocks performed well?
Investors have been reluctant to invest heavily in US small-cap stock names because they haven’t outperformed the large-cap names for a long time.
In nine of the last 11 years, large-cap stock indexes have performed significantly better than small-cap stock indexes. Last year, the Russell 2000, for instance, returned only 10% compared to the S&P 500’s well over 20%.
Ginsberg says that there is reason to believe this Trump trade was preparing for a significant run to the upside, which could materialize in the next quarter.
What signals a major move up in small-cap stock prices?
It’s not been that long since small-cap stocks struggled to recover from the read.
According to Wolfe Research’s strategist, “further gains look likely” as the Russell 2000 continues to grow.
In a research note he wrote last week, he said that the index had “carved out a compelling base over a multiyear period after several years of choppy trading and range bound struggles”.
The small-cap index is currently a little under a key resistance level at 2,450. Ginsberg wrote in his report that a breakout could open the way for “a massive rally” in the group.
What could interest rate cuts mean for the Russell 2000?
It is expected that President Trump will favor policies that will boost the US economy by 2025. Some experts predict that the GDP could even increase by up to 5.0% this year.
This could be significant for small-cap firms, as they generate a larger portion (up to 80%) of their revenue in the domestic market.
Small-cap stocks are a good investment, as the Fed is expected cut interest rates further by 2025.
Why? Smaller companies are often more indebted. Decreased borrowing costs can therefore help free up capital for growth.
Small-cap companies also rely on external financing. The cost of obtaining this funding is reduced when interest rates drop.
These smaller companies are more agile and have more room to grow than their larger counterparts.
They can now take advantage of growth opportunities with ease.
This post Here’s an unplayed Trump trade may be updated as new information becomes available
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