The recent resurgence of small-cap stocks following the U.S. election has caught the attention of Capital Economics strategists as they analyze this market trend in a note to clients. While the performance of small-cap stocks has been described as “broad-based,” the strategists caution against assuming that this pattern will persist indefinitely.
Key Points from Capital Economics Note:
- Different Sectors in Small-Cap Stocks: Capital Economics observed that every sector, with the exception of consumer discretionary, has shown better performance in the S&P 600 compared to the . This variation across sectors underscores the dynamic nature of small-cap stocks and reflects the complexity of market trends.
- Historical Trends: Referencing the 2016 election when Trump emerged victorious, Capital Economics highlighted how small-cap equities struggled throughout much of 2017. They attributed this underperformance to delays and reductions in significant fiscal stimuli, suggesting that history may repeat itself with the potential for limited fiscal stimulus in 2025.
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Federal Reserve Influence: Recognizing the current trend of the Federal Reserve loosening policies, Capital Economics pointed out the historical relationship between such easing cycles and the outperformance of small-cap stocks. However, they cautioned that this correlation is not always definitive, as looser policies often coincide with negative macroeconomic conditions like market downturns or recessions.
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Future Outlook: Emphasizing a cautious stance, Capital Economics expressed skepticism about sustained outperformance of small-cap stocks in the first half of 2025. They indicated that a significant shift favoring small caps over large caps might not occur until near the peak of the AI bubble, which they do not foresee happening in the near future.
In conclusion, Capital Economics cast doubt on the long-term trajectory of small-cap stocks, urging investors to approach this market segment with a critical eye. While recent gains have sparked interest, the firm’s analysis suggests a more nuanced perspective is needed to navigate the complexities of small-cap investing effectively. Stay vigilant, remain informed, and maintain a strategic approach in the ever-evolving landscape of financial markets.
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