Broadening Horizons: Looking to Small- and Mid-cap Stocks
We believe the opportunity is ripe for smaller and medium-sized companies, for three big reasons.
1. Believe it or not: Small- and mid-cap stocks have outperformed large-cap companies over the last 25 years.
We all tend to suffer from a bit of recency bias. We expect what happened in the past to repeat. Big tech galvanized large-cap stock returns over the last decade, earning a whopping 160% price return since then. Yet, a look at returns over the last 25 years shows us that smaller companies have actually outgrown and outperformed larger firms. All that’s to say, the large-cap outperformance over the last few years may be the exception, not the rule.
2. It’s so bad, it’s good. We think valuations and earnings estimates have bottomed — cue entry point.
Over the last year, across all market capitalization ranges, estimates for corporate profits have plunged over 10%. But the largest declines have been in small-cap equities, and the pain has been so acute that we’re starting to see a bounce higher. What’s more, valuations for both small- and mid-cap companies have corrected to levels we usually see during recessions (while large-cap valuations are still in line with their long-term averages).
3. The leaders of the next cycle likely won’t be the same as the last — and SMID-cap companies could take the baton.
In the past cycle, growth was synonymous with tech, buoyed by ultralow interest rates. Looking forward, it’s hard to see mega-cap tech companies maintaining their pace of growth, especially as key markets become more fully penetrated and valuations still look pretty stretched. On the other hand, SMID-cap companies look poised to benefit from increased capital markets activity, a new era of capital expenditure spending focused on the real economy (thanks to a greater weighting toward sectors such as industrials, materials and real estate), and the ongoing push to bolster supply chains amid geopolitical tensions (as companies seek to onshore their production).
In the end, we believe large-cap stocks are the most important drivers of capital appreciation for investors over the long term. But right now, there is more to the market than just the biggest companies.Â
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
