Dow Hits 40,000: Are Small Caps Ready for a Historic Comeback?

The Bulls are running as the Dow hit 40,000 today, triggering a potential comeback for small caps after an extended period of underperformance. Is now the time?

Francis Gannon, Co-CIO of Royce Investment Partners, presented a compelling case for the resurgence of small-cap stocks. He highlighted two main factors driving this potential shift: attractive valuations and robust net income estimates. Historically, small-cap stocks have demonstrated an impressive ability to outperform their larger counterparts during certain economic cycles, particularly when market conditions favor growth and recovery.

Gannon's analysis underscored that small caps are currently positioned at a point of relative undervaluation compared to their historical averages. This undervaluation provides an appealing entry point for investors looking to capitalize on future growth. Moreover, the economic environment appears quite supportive, with several key indicators pointing towards a favorable backdrop for small caps.

The performance of the Russell 2000 Index, which tracks the 2,000 smallest publicly traded US companies is a crucial part of this narrative. Recent trends in this index suggest that small cap stocks may be poised for a rebound, particularly as investor confidence grows and economic conditions continue to stabilize.

Adding depth to this perspective, Zachary Weiss, Senior Analyst at Royce Investment Partners, shared insights on the strategic growth of premier quality small cap companies. Weiss emphasized that many small firms are not only surviving but thriving by focusing on innovative solutions and adapting swiftly to market changes. These companies often exhibit a strong entrepreneurial spirit, allowing them to seize opportunities that larger firms might overlook.

It's been quite a week so far: Three major indexes ripped to new intraday highs: Roaring Kitty and the meme stock frenzy resurfaced, and the bulls are charging ahead on bets that inflationary pressures will ease, and rate cuts are looming. Sentiment is up, and expectations for a long bull run are strong.

For investors seeking to diversify their portfolios and leverage growth opportunities, quality small caps offer a unique proposition. First, attractive valuations and promising income estimates relative to large caps (outside of Nvidia), suggest that now could indeed be the time for a comeback. However, not all small caps are equal. Those who can consistently execute with high profitability are most appealing. While risks remain, the potential for substantial returns make select small caps an exciting prospect.

This content is intended to highlight current market conditions and should not be considered advice, an endorsement or a recommendation, nor is it intended to serve as impartial investment or fiduciary advice. #DYOR

---