Small caps are about to beat large stocks for the first time in eight years, according to Jefferies. Smaller companies with market capitalizations of about $250 million to $2 billion are attractive to investors as they offer more potential for growth than their large cap peers, but they’ve underperformed at “extreme levels” relative to large caps over the past decade. In fact, the last eight years of underperformance is the “longest losing streak ever” for the asset class, according to Jefferies’ small cap equity strategist Steven DeSanctis. Small caps now constitute less than 4% of the entire U.S. equity market, and are at levels not seen since the 1930s, he noted. Still, a number of factors have convinced DeSanctis the tide will continue turning in 2025, including a strong earnings growth outlook, attractive valuations relative to large-cap, as well as an easing interest rate environment. “We see the Russell 2000 gaining 13.5%, hitting 2715 by yearend ’25, finally beating the large caps after 8 long years of underperformance,” DeSanctis wrote on Monday. .RUT YTD mountain Russell 2000 The 2,715 level for the Russell 2000 would represent an all-time high, up more than 300 points from where the index closed Monday, at 2,392.84. The Russell 2000 surged more than 18% in 2024, underperforming the large-cap Russell 1000’s and S & P 500’s near-27% advance. This quarter, however, the Russell has climbed more than 7%, outpacing the S & P 500’s 5% gain. Still, the strategist said strong earnings growth lies at the crux of his thesis, leaving small caps needing to deliver earnings growth of 13%, better than large-caps, in order to outperform. “The whole ball game comes down to whether small caps can deliver comparable or better earnings growth in ’25,” he wrote.
