Small-cap stocks are experiencing a significant shift, with the Russell 2000 index up 15.9% year-to-date, outperforming the S&P 500’s 13.4% gain. This change is attributed to strong earnings growth, with small-cap companies projected to have an average earnings growth of 189.8% and sales growth of 67.5%, in contrast to the S&P 500’s 28.9% earnings growth forecast for the third quarter.
Historically, small caps have been undervalued, currently trading at approximately 85% of the valuation of larger stocks as represented by the Russell 1000 index. This is significantly below the historical average of 100%. Notably, small caps only constitute about 4% of the total U.S. stock market, down from a historical average of around 9%, indicating substantial potential for growth.
Experts like Louis Navellier and Marc Chaikin are optimistic about the long-term prospects for small-cap stocks, suggesting that the current rally could be just the beginning as these companies begin to generate stronger earnings amidst low valuations.
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