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Why the postelection rally in the market's smallest stocks probably won't last
The momentum in small-cap stocks likely won't last despite a burst of postelection energy fueling the shares.
The market's smallest stocks surged to record highs after Donald Trump's election, sending the Russell 2000 to a peak of 2,466.48 on Monday, a gain of 9% since Trump's victory.
But according to Capital Economics, investors shouldn't expect the bullish momentum to last.
"We aren't convinced the outperformance of US small-cap equities since Donald Trump's victory on 5th November sets the tone for the first half of 2025," chief markets economist John Higgins wrote.
It is worth looking at small-caps in the context of 2016, the research firm said. Though small-caps also outperformed their larger peers after Trump's first win that year, they went on to underperform for much of 2017.
This time, small-caps are rallying on the hope that Trump's protectionist trade policies and pledge to deregulate the economy will boost domestic businesses . Possible tax cuts would also also benefit the small-cap segment, JPMorgan wrote after the election.
Despite the excitement, there's no technical evidence of a sustainable shift toward small-cap leadership, said Adam Turnquist, LPL Financial's chief technical strategist.
Though bullish analysts expect the small-cap index to outperform due to its relatively lower valuations , Trunquist said that the argument was losing merit. As of mid-November, Russell 2000 earnings-per-share were nearly four points higher than its 10-year average multiple, he said.
"Furthermore, small-cap revenue growth has been disappointing, with third and fourth-quarter RTY revenues forecasted to be 0.0% and 0.2%, respectively. This compares to expected S&P 500 revenue growth of 6.2% and 4.3% for the respective third and fourth quarters," he wrote on November 19.
Capital Economics suggested that a rally would resume if large-cap shares pulled back. Historically, small-caps gain when broader stock market bubbles pop.
"It's worth noting, though, that the underperformance of SC equities amid the growing hype around the internet began to unwind in mid-1999, well before the dotcom bubble burst," Higgins wrote. "So, SC equities might embark on a sustained period of outperformance later next year if there is a bubble in AI that bursts at some point in 2026."
Read the original article on Business Insider