Small-cap stocks are staring to show signs of life and Wall Street analysts are turning bullish on the trade as the market rally broadens out beyond mega-cap %Technology names.
The Russell 2000 index that is comprised mainly of stocks with market capitalizations below $10 billion U.S. has risen 6% in the past month, outpacing the benchmark S&P 500’s 4% gain.
Small-cap stocks leading the charge higher include %Carvana (NYSE: $CVNA), %SuperMicroComputer (NASDAQ: $SMCI), and %ComfortSystemsUSA (NYSE: $FIX).
Despite underperforming mid- and large-cap stocks for more than a decade, analysts on Wall Street now appear to be cautiously optimistic on small-caps.
Reasons forecasters are turning bullish include a revived market for initial public offerings (IPOs) after several down years.
Most start-up companies that IPO begin their publicly traded life as a small-cap stock.
An economic downturn could also benefit small-cap stocks as smaller businesses with less foreign exposure have historically performed well during bear markets.
Market data shows that, over the last 20 years, small-cap stocks have gained an average 60% in the year following a bear market.
Valuations of small-cap stocks are also more attractive than the valuations seen in large-caps, particularly technology stocks. This could further spur an investor rotation, say analysts.
Lastly, small-cap stocks, which tend to be of smaller companies with a domestic focus, are less vulnerable to import tariffs than larger, international concerns.
Plus, the U.S. decreasing its reliance on supply chains in foreign countries is likely to support small domestic firms across America.
In all, a greater focus on the U.S. economy is a positive for small-cap stocks, say analysts who argue that now could be a great time to consider securities with smaller market caps.
Comfort Systems USA, a small-cap stock that is focused on plumbing, piping and HVAC units, has seen its share price rise 24% this year to trade at $532.58 U.S. per share.
