American small-cap stocks will bounce back

Smaller companies in America will play catch up with their bigger peers.

The US stockmarket as a whole is expensive compared to its history. However, anyone looking to invest in America might want to look at the smaller company index the Russell 2000.

While the S&P 500 blue-chip index is up by around 8% this year, the Russell is little changed. But there's scope for small-cap stocks to play catch up.

Small businesses are at their most optimistic in seven years, with confidence nearing its pre-recession average. That makes sense because small caps are domestically orientated, they benefit most from household spending, which accounts for the lion's share of America's GDP.

And for now at least, the US consumer is in fine fettle. Consumer confidence is also at a seven-year high now that the labour market is rapidly gaining strength. There is talk of this being the best Christmas shopping season since the crisis.

As a result, "we don't expect the divergence between the economic performance of small firms and the small-cap equity market to last long", says Capital Economics.

Another boost for small caps is that they are barely exposed to currency risk, whereas the strengthening dollar undermines the S&P's foreign sales worth around half of total revenues.

A further reason to like small-cap stocks is that their earnings quality is higher, notes Barclays. Since the recovery began, large caps have beefed up their earnings mainly by managing costs smaller companies have focused on bolstering sales.

The Russell 2000 should also benefit from cash-rich blue chips looking to scoop up smaller rivals. Given all this, the Russell seems set to close the gap with its blue-chip rival over the next few months.

Recommended

Federal Reserve raises interest rates by 0.5%
US Economy

Federal Reserve raises interest rates by 0.5%

The latest hike by the Federal Reserve takes the US benchmark rate to 4.25% - 4.5%.
15 Dec 2022
US stimulus checks – will you get one?
US Economy

US stimulus checks – will you get one?

To help fight high inflation and financial hardships, some US states have started to send stimulus checks to support residents. Here’s what you need t…
14 Nov 2022
US inflation drops to 7.7%
US Economy

US inflation drops to 7.7%

Costs for rents increased, but the price of cars, clothes and medical care helped slow the rate of inflation in the US
11 Nov 2022
Federal Reserve hikes interest rates to 4%
US Economy

Federal Reserve hikes interest rates to 4%

The Federal Reserve continues its battle with inflation with another bumper interest rate hike.
3 Nov 2022

Most Popular

Council tax increases 2023 – how much more will you pay?
Tax

Council tax increases 2023 – how much more will you pay?

Your council tax bill will go up in April - we reveal the councils that have confirmed what this year’s increase will be.
23 Jan 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Wholesale gas prices are on a downward trajectory, but does this mean lower energy bills later this year?
27 Jan 2023
When will interest rates go up?
UK Economy

When will interest rates go up?

New interest rates will be announced on 2 February – we look at what to expect.
26 Jan 2023