Even though their post-election surge has recently cooled, both small- and mid-cap equities remain well-poised in today’s market environment, according to two portfolio managers at Goldman Sachs in a recent Barron’s article.
The authors outline the following supporting factors:
- President Trump’s’ agenda could “benefit small- and mid-cap companies disproportionately” since a large portion of their revenues come from domestic operations. Corporate tax reform could also have a bigger impact on smaller companies.
- The post-election surge might be a good sign. Historically, the authors argue, “months with the highest Russell 2000 returns have been followed by even stronger periods of performance, measured on both an absolute basis and relative to large-cap stocks.” Tax reform and increased fiscal spending, they argue, could offer an additional boost.
- Even with higher valuations, the article asserts, “we see factors that could contribute to an inflection in earnings growth” and smaller companies’ operating margins could have “upside potential” (they are currently 26% below peak levels).
- Smaller companies tend to outperform in a rising rate/strong dollar environment. “If the current transition to a more reflationary environment takes hold,” the managers contend, “we see the potential for a positive impact on smaller companies.”
- Investors shouldn’t overlook the mid-cap segment. Based on their experience, the authors note that many investors make this mistake. “SMID has outperformed small-cap 87% of the time since the Russell 2500 Index’s inception,” while experiencing less volatility.