Small stocks poised to replace Wall Street giants | Financial markets

The US elections continue to be market news now that the euphoria of the first sessions has passed. While waiting to see how the new administration’s initiatives take shape, stock exchanges are seizing the opportunity to consolidate positions; Despite the fixation of specific profits, the trend remains bullish. The S&P 500 index is up 23% for the year and continues to set records, building on its strong readings.

For small stocks, however, the post-election reaction was even sharper: the Russell 2000 rose 5.84% compared with the S&P’s 2.53%, with a quarter of the index’s small stocks posting yearly highs, the most high performance. Amount for three years. That reinforces one of the mantras managers have been defending for months: Small-cap stocks are best positioned to take advantage of the “America First” policies championed by Trump. In the Republican’s previous term, the Russell 2000 index rose 60%, very similar to the 57.4% gain for the S&P 500. As the idea sweeps through the markets, investors are starting to do the math to see if it’s time to move away from big stocks. signatures and pay attention to small values. Over the past four years, the S&P 500 is up more than 58%, compared with 18% for the Russell 2000.

Adrian Hostaled, market analyst at XTB, argues that the new wave of tariffs the US government wants to implement targeting China will boost traditional sectors of the economy while boosting consumption and national demand, and that is small-cap companies. which concentrate the bulk of sales in the United States. Thus, at a time when large listed companies are beginning to show signs of exhaustion, investors have taken advantage of these expectations to accelerate portfolio rotation into smaller-cap securities. “Small companies have been off the menu for many investors over the past 10 years. This created a great valuation opportunity: they are much cheaper than the larger ones. Now the combination of economic growth policies and increased protectionism is more favorable to companies focused on the domestic market, mainly medium and small,” emphasizes Carlos Arenillas, a member of the investment team at Panza Capital. In the latest survey of Bank of America managers, which includes the first post-consultation scores, commitment to small values ​​has increased sharply: the difference between overweight managers compared with those who are underweight is 35%, compared with the month before. it was barely 6%. Best rating since February 2021.

The policies come as major economies have begun to reposition supply chains in the wake of the pandemic and supply chain challenges. Goldman Sachs emphasizes that countries have realized the importance of restoring manufacturing, and the United States has begun a process of reindustrialization that has not happened for several decades.

Jose F. Ramos, A&G’s head of consulting and analysis, adds that in addition to higher tariffs, small businesses will benefit from Trump’s deregulation, which could spur mergers and acquisitions, and tax cuts. . This will help bring the results to life. While the market saw earnings growth outside of large-cap stocks in the third quarter, earnings growth for smaller companies remained subdued. Bloomberg Intelligence estimates earnings growth for Russell 2000 companies at 1.4%, compared with 8% for the S&P 500, while revenue rose just 0.2%, compared with 4.8% for large companies. Experts are postponing recovery to the second half of 2025. “Many movements towards the winners in the face of Trump’s victory have already occurred. From here we need to start seeing a real impact on earnings potential,” says Emily Leveille, portfolio manager at Thornburg Investment Management.

Another factor that has favored small-cap stocks in recent months is rate cuts, an idea that is starting to be questioned due to the strength the economy continues to show. The day after Trump’s victory was announced, the Federal Reserve made its second rate cut. Antonio Castelo, an analyst at iBroker, notes that the recent decline in the price of money has been a key factor in this recovery. Alfonso de Gregorio, investment director at Finaccess Value, is moving in the same direction, saying that rate cuts are particularly important in those companies financed at floating rates, where they have less opportunity to extend the average term of the debt portfolio. more exposed to refinancing risk. This has become especially important in recent years as central banks have sharply raised rates to curb inflation.

The Fed continued its process of easing monetary policy, but its President Jerome Powell stressed that price stability and employment remained its goals and that he would not be willing to bow to House White’s demands. While he declined to comment on Trump’s expansionist plans, higher tariffs and tax cuts are obstacles to achieving the 2% goal. Goldman Sachs estimates that if the new administration applied a 10% tariff on all its imports, raised it to 20% for China, and all countries retaliated, US inflation would rise by 1%. This will limit the central bank’s ability to cut rates further. With a rate of 2.6% according to the latest data, market operators have already begun to take into account that the Fed will again reduce the price of money in December and pause in January.

In fact, Morgan Stanley analysts warn that the main difference between the current context and the previous Trump mandate (2016-2020) lies in the rate scenario. The key risk that is present now that was not present eight years ago is the negative correlation of the market with rates. If rates rise, mid- and small-cap companies could see a slower economic recovery.

Difficult prospects on the Old Continent

The outlook for small-cap stocks in Europe is bleaker. The Ibex Small Cap Index is battling session after session to avoid losses for the year against the Ibex 35 Index, which, although it has lost key supports in recent days, is accumulating a 15.15% overvaluation for the year, leading the Old Continent’s major indices. . In turn, Stoxx Small lost 4.74%; French Cac Small – 8.74%, and only British FTSE Small managed to gain 5.7%. Goldman Sachs emphasizes that this behavior is largely due to the fact that economic growth in Europe is mediocre, which is a negative aspect for smaller companies that are more cyclical and focused on the manufacturing sector. “Small-company stocks tend to underperform when investors worry about the risk of a recession or when consumer confidence falls,” they said from the US bank. While the eurozone PMI, a leading indicator of economic health, rose to 51.6 in October, the manufacturing index stood at 46, below the 50 that separates expansion from contraction.

Future prospects aren’t much more promising. A&G emphasizes that tariff policy should further weaken economic growth in Europe. “The United States and Europe will increasingly diverge on growth rates, fiscal policies and interest rates, and we will be hard-pressed to find a catalyst that can turn the tide,” Ramos says. The expert highlights lower estimates and the expected looser monetary policy as a positive aspect. If economic growth continues to decline, the ECB may accelerate rate cuts. An idea that iBroker is quarantining. “If the Fed were less willing to cut rates, the ECB would have to consider another rate cut because the result would be a weaker euro and inflation would end up being imported,” Castelo says. Trump’s victory and the prospects for further growth of the US economy above its potential are bringing the euro-dollar parity closer day by day. The community currency fell below $1.06, a 12-month low.

Given the weak macroeconomic data, Ignacio Cantos, investment director at Atl Capital, highlights the lack of investor interest in European equities in general and Spanish equities in particular. Although managers cite good options such as Gestamp, Técnicas Reunidas, Cie or Vidrala, experts acknowledge their limited ability to attract market attention. The situation is exacerbated by the rise of passive management, which tends to mimic the behavior of indexes. Kantos emphasizes that over the past 20 years, the weight of the United States in world indices has grown from 45% to the current 67-68%.