5 minute read

We often read about the stock market's biggest names, those that dominate headlines, but there's a whole universe of smaller companies out there that might be worth your attention. Here’s why small-cap stocks – companies with relatively modest market values – could be poised for an interesting year ahead.

A small comeback

History suggests that US small-cap stocks often perform well after presidential elections, especially when three key factors align: economic growth (check), interest rate cuts (check), and business-friendly policies (check). While past performance doesn't guarantee future returns, several tailwinds could support these smaller companies in the months ahead.

The Russell 2000 Index, which tracks US small-cap companies, picked up after the dust settled on the presidential election. That's likely because these companies typically focus more on the domestic market, which could prove advantageous with America-first policies.

The Fed's ongoing rate cut cycle is a key catalyst. Small-cap companies often carry higher debt loads than their larger peers, so lower borrowing costs could significantly improve their profitability. Plus, rate cuts tend to boost consumer spending – a big positive for smaller, domestically-focused firms.

And the prospect of corporate tax cuts under the returning president could disproportionately benefit small-cap firms. Unlike large multinationals with complex international tax structures, small-cap companies typically pay closer to the local tax rate.

What’s the takeaway here?

Small-cap stocks come with their own set of risks – they can be more volatile than their larger cousins, and may struggle more during downturns. But they also offer unique advantages: because of their size, they often have more room to grow and can be more nimble in adapting to market changes. 

While many investors gravitate toward familiar large-cap names, having exposure to smaller companies helps diversify your portfolio. Our April reoptimisation reflected this view by adding an equal-weight S&P 500 ETF to our General Investing portfolios, providing more balanced exposure across company sizes (you can also find this ETF in our Flexible Portfolios!).

📰 In Other News: China's factories ramp up as tariffs loom

Chinese manufacturers kicked into high gear in November, with a key measure of factory activity – the Caixin/S&P Global manufacturing PMI (Purchasing Managers' Index) – hitting a 5-month high of 51.5, well above analysts' expectations of 50.5. The private survey, where readings above 50 indicate expansion, largely echoes official data showing a strengthening in the manufacturing sector.

The uptick appears driven both by domestic stimulus and concerns over future US trade policy. With Trump promising 10% tariffs on Chinese imports, manufacturers are racing to ship orders before any trade barriers go up. New export orders rose for the first time in four months, with companies citing "stockpiling following the US election".

While recent stimulus measures seem to be filtering through to the real economy, it’s not all smooth sailing. Employment continued to contract and input costs rose at their fastest pace in five months, pressuring manufacturers' margins. Still, optimism in the sector has hit an eight-month high, even as the country eyes a 5% growth target for 2025.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Small-cap stocks

Small-cap stocks refer to relatively smaller companies on the stock exchange. The "cap" stands for market capitalisation – a company's total value calculated by multiplying its share price by its total number of shares. While definitions vary, small-caps typically have market values between $300 million and $2 billion. Think of it like comparing businesses in a city: if large-cap companies are like major department stores, small-caps are more like successful local retail chains big enough to be established businesses.

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