Will small-cap stocks ever recover?
Some investors think earnings could drive the next leg higher for small-caps. Analysts expect earnings growth among companies in the Russell 2000 to rebound to 28.2% in 2024, after an expected decline of 11.2% for 2023, according to FTSE Russell.
We expect earnings to drive the next leg higher for small caps. According to FTSE Russell, analysts anticipate that expected earnings growth among companies in the Russell 2000 will rebound by 28.2% in 2024, after an expected decline of 11.2% in 2023. The timing depends somewhat on the ultimate path of the US economy.
We expect earnings to drive the next leg higher for small caps. According to FTSE Russell, analysts anticipate that expected earnings growth among companies in the Russell 2000 will rebound by 28.2% in 2024, after an expected decline of 11.2% in 2023.
With the economy roaring through early 2024, capitalizing on small-cap stocks would be a worthwhile move during this upswing. After a roaring 2023, with the S&P 500 up about 26% last year, we've seen a continued bullish environment to start 2024.
Gannon said the explosion in small-cap shares in the fourth quarter portends well for the group in 2024, as well as for the market in general. When the equal-weighted Russell 1000 outperforms as it did the final three months of last year, small-caps typically outperform the S&P 500 by 600 basis points, he said.
Risk. Small-cap mutual funds are very risky. This means that in the short term, investing in them could lead to short-term losses.
Equity investments require long-term horizons of preferably 3-5 years. But small-cap equity may require an even longer horizon of 5-7 years to account for periods of high volatility. A longer horizon gives you a much better chance of earning the higher returns you're taking the higher risks for.
Based on consensus earnings per share, we expect small-cap profits to grow faster than large-cap profits in most regions in 2024. In addition, the headwinds of rising interest rates faced by small-caps — especially small-cap growth stocks — appear to be on track to diminish or reverse.
Given the changing macroeconomic backdrop, we outline why we see potential value for investors in small caps in 2024. The consensus is that interest rates look to have peaked, with markets now pricing in cuts across many major economies in 2024, something which could prove beneficial to small caps.
| Stock | Expected Change in Stock Price* |
|---|---|
| Tesla Inc. (TSLA) | 61% |
| Mastercard Inc. (MA) | 14.2% |
| Salesforce Inc. (CRM) | 7.2% |
| Advanced Micro Devices Inc. (AMD) | 11.3% |
How risky are small-cap stocks?
Small-cap stocks tend to offer greater returns over the long-term, but they come with greater risk compared to large-cap companies. The greatest downside to small-cap stocks is the volatility, which is greater than large-caps.
The small cap funds offered an average return of around 17.48% in a five year period. Small cap schemes are benchmarked against Nifty Smallcap 100 - TRI, Nifty Smallcap 250 - TRI, and S&P BSE 250 Small Cap - TRI.
A key reason for this is that small caps have struggled in the high interest rate environment more than large companies. Small caps tend to be more focused domestically with earnings growth often closely tied to how the U.S. economy is performing or sentiment about how the economy will perform.
Given that advisors are fond of saying that small cap stocks are much riskier than the stock of larger companies, it usually surprises investors to find out that, over long periods, small cap funds outperform their large cap counterparts.
| S.No. | Name | CMP Rs. |
|---|---|---|
| 1. | Contil India | 126.00 |
| 2. | Apollo Finvest | 1014.00 |
| 3. | R Systems Intl. | 448.80 |
| 4. | Kreon Finnancial | 40.00 |
| Company | CMP (Rs) | Sales CAGR (3 yrs, %) |
|---|---|---|
| AMANI TRAD | 382.1 | 1,272.2% |
| BRONZE INFRA | 1.0 | 1,119.9% |
| BALU FORGE | 227.4 | 1,070.7% |
| MODERN CONVERTERS | 99.9 | 929.9% |
Hence, it is important to have a long-term investment window while investing in Small-Cap Funds so that you give sufficient time to your investment to generate returns. The recommended time frame is eight to ten years. Making these funds highly suitable for long-term investors.
In an analysis of foreign and U.S. investments from December 1998 through June 2023, researchers at index provider MSCI found that small-cap stocks outperformed large firms over 15-year periods about 9 in 10 times.
Small caps are also more susceptible to volatility due to their size. It takes less volume to move prices. It is common for the price of a small-cap stock to fluctuate 5% or more in a single trading day. That is something that many investors simply cannot stomach.
For an average investor, small-cap funds should not exceed 20-25 per cent of the overall portfolio. In an equity-only portfolio, as per Kochar, around 40-50 per cent can be in large cap, 40-45 per cent in mid-cap and 10 per cent in small-cap funds.
Will international stocks do well in 2024?
2024 may be a good time to look for bargains in international stocks that have the long-term potential to deliver higher returns than US stocks. Fidelity's Asset Allocation Research Team (AART) forecasts that international stocks will outperform US stocks over the next 20 years.
Until the back half of 2023, the Russell 2000's earnings growth declined for four straight quarters. However, in Q3 and Q4 2024, they rebounded strongly, and Zacks Consensus Earnings Estimates suggest that the positive momentum will continue.
At UBS, strategists Jonathan Golub and Patrick Palfrey now expect the S&P 500 to end 2024 at the 5,400 level, implying roughly 8% upside from Friday's close of 5,005.57.
Profit growth for the S&P 500 is estimated to be 12% in 2024 after tracking slightly down in 2023. Mid-caps are expected to post 8% y/y growth in 2023 and 2024, while small caps are anticipated to rebound from profit declines of 10% in 2023 to 23% growth in 2024.
Mid-caps are slightly riskier than large-cap stocks and less risky than small-cap stocks. Small-cap stocks are riskier than the other two. Despite the risk, these stocks have great growth potential. Large-cap funds are usually less volatile unless there is some news.
