Capitalizing on the Small-Cap Stock Surge of 2025
Are you prepared to ride the wave of opportunity?
When we talk about a “perfect storm,” we’re not referring to recent harsh weather events. According to the Collins Dictionary, a perfect storm occurs when an unusual series of events leads to a significant or negative outcome.
Currently, we’re witnessing a potential perfect storm for small-cap stocks, and it’s crucial for investors to be ready to seize the upcoming opportunities.
In this edition of Market 360, I’ll explore three key factors that suggest a powerful surge for small-cap stocks in 2025. Additionally, I will guide you on how to identify small-cap stocks with strong fundamentals to keep your investment strategy on track this year.
Understanding Small-Cap Stocks
Before diving into the details, let’s clarify what a small-cap stock is.
Small-cap stocks refer to companies with a market capitalization ranging from approximately $300 million to $2 billion. This contrasts with large-cap stocks, which are valued at $10 billion or more.
What makes small-cap stocks appealing? Their smaller size offers the potential for greater returns. After all, many investors aspire to own stocks like Apple Inc. (AAPL) or Amazon.com, Inc. (AMZN).
However, investing in small caps carries increased risk and volatility. The wrong choice can negatively impact your portfolio significantly. In contrast, selecting the right small-cap stock might lead to substantial gains.
Now, let’s explore why 2025 could be a banner year for small-cap stocks.
Reason 1: The U.S. Stands Strong Amid Global Turmoil
The first factor is that the United States remains a stable environment amid a tumultuous global landscape.
While I won’t delve into specifics about conflicts in Ukraine or the Middle East, it’s worth noting that many parts of the world are grappling with recession risks driven by political instability and leadership challenges.
For example, recently, Canada’s Prime Minister Justin Trudeau resigned under pressure from escalating crises and trade threats from then-President Donald Trump.
Europe is not without its own troubles either. Germany is preparing for elections in February, where the Alternative for Germany (AfD) party is expected to perform well, advocating for stricter immigration policies and tax cuts.
France faces its own challenges as President Emmanuel Macron’s party struggles with a parliamentary minority, increasing uncertainty around fiscal policy.
In contrast, the U.S. shows relative stability. If Trump’s administration effectively addresses manufacturing and foreign conflicts, we could see growth rates soaring between 4% and 5% in 2025, with a slight chance of hitting 6% if reforms are implemented efficiently.
This level of growth could be particularly beneficial for small-cap stocks.
Reason 2: Strength in the U.S. Dollar Fuels Small Caps
The second factor driving optimism for small-cap stocks is the strength of the U.S. dollar, as displayed in the following chart.
A strong dollar reduces the cost of imports, enhancing consumer purchasing power. As a result, domestic spending is likely to rise, benefiting small-cap companies.
Moreover, small-cap firms that rely on imported materials will see lower production costs, enhancing their profit margins.
In contrast, countries with weakened currencies face inflation challenges. Last year, the Brazilian real dropped 21% against the dollar, and the Mexican peso fell by 19%. Europe is experiencing similar trends, complicating their economic outlook.
With the dollar’s strength, domestic-focused stocks such as small and mid-cap companies may outperform larger multinational companies that derive significant revenue from abroad. This shift could favor small-cap investments.
Reason 3: Anticipated Decline in Interest Rates
The final reason for optimism is the expected decline in interest rates by the Federal Reserve this year, possibly up to four times, which bodes well for small-cap stocks.
Inflation is showing signs of easing, with the Consumer Price Index (CPI) rising only 0.4% month-over-month in December. However, the core CPI, which excludes food and energy, indicates a trend towards reduced inflationary pressure.
Small Caps Set to Flourish Amid Cooling Inflation
Latest Inflation Trends Influence Interest Rate Outlook
In December, core consumer prices inched up by only 0.2%, a slowdown compared to the 0.3% increase in November. Year-over-year, core prices rose by 3.2%, marking the first decline in growth since July. The recent inflation data has led Treasury yields to decrease, raising optimism that the Federal Reserve may consider further interest rate cuts this year.
Global Rate Cuts Could Pressure the Fed
As central banks worldwide implement more rate cuts to stimulate their economies, the pressure on the Fed is likely to intensify. Investors seeking better returns may flock to U.S. treasuries, which would drive down market rates. The Fed typically avoids opposing bond market trends, suggesting they may reduce rates as well.
Positive Implications for Small-Company Stocks
Lower interest rates bode well for small-cap companies, which often carry larger debt loads compared to their larger counterparts. These firms generally see improved loan repayment conditions, enabling them to redirect capital towards growth initiatives. This shift can ultimately lead to faster growth for small caps relative to large-cap stocks.
Positioning for Profit in 2025
Given these circumstances, it appears that 2025 may be a promising year for small-cap investments. To capitalize on this potential, having a reliable investment strategy is crucial.
For over four decades, I have utilized my own system, Stock Grader (subscription required), to identify high-performing stocks consistently. My system successfully rated all of the top 30 stocks during Trump’s first term, indicating a strong potential for similar successes in the future.
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Currently, I have identified five stocks poised to benefit from the anticipated Trump 2.0 agenda. Notably, four of these selections are small-cap or mid-cap stocks, allowing significant growth potential.
These stocks not only showcase robust fundamentals but also exhibit strong buying momentum, suggesting they will likely yield swift returns for those ready to act.
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(Already a subscriber to Accelerated Profits? Click here to log in to the members-only website.)
Sincerely,
Louis Navellier
Editor, Market 360
