October 9, 2024: Will the Small Fish Catch Up to the Big Whales?

2024 is set to mark the fourth consecutive year of small-cap stock returns lagging large-cap stock returns. But optimism has surfaced on the horizon. Analyst forecasts point to parity in revenue growth between large caps and small caps in the second half of 2025. Should this materialize, small-cap stocks could soon be back in favor.

Much depends on economic conditions, and recent data are mixed. Contracting manufacturing activity and the potential for a slower-than-expected pace of rate cuts could weigh on the small-cap earnings. Nevertheless, positive data potentially outweigh these downside risks. The labor market appears to be cooling, yet stable. Inflation has trended in the right direction. And should the Fed’s rate-cutting cycle aid a manufacturing recovery, small-cap earnings are likely to benefit.

Additionally, only 36% of the small-cap stocks are expected to be profitable and to grow earnings this year. This reality presents opportunities in multiple sectors for active managers. Examples include software and AI-focused companies in Technology, companies benefitting from infrastructure investments in Industrials, and medical device companies in Healthcare.

Overall, an improving growth profile and active approach could yield benefits for small caps moving forward.

Weekly Market Update: October 9, 2024