In a surprising turn of events, small-cap stocks are poised to outperform the S&P 500 by a significant margin in 2024, according to Fundstrat’s Tom Lee. With projected earnings, valuations, and revenue growth set to outshine large-caps in 2025, investors fixated on mega-cap names might be missing out on potential in a more low-key corner of the stock market.
Lee, who accurately predicted the stock market forecast for 2023, highlighted three fundamental reasons why small-caps are the top idea for 2024. First, he noted that Russell 2000 firms are expected to experience substantial revenue growth, outpacing the S&P 500 thanks to the Fed’s potential rate cut. Second, small-caps have the potential for 19% earnings-per-share growth, outpacing the S&P 500’s 12% growth, making them more affordable to investors with lower P/E ratios. Lastly, institutional investors have been dumping small caps for years, setting them up for a turnaround trade.
The conditions setting small caps up for a big rally mirror the situation in 1999 when the sector began a streak of outperformance that lasted over a decade. Lee pointed out that from 1999 to 2011, small-caps outperformed by 650 basis points annually, totaling a cumulative 113%.
With small-caps poised for significant growth and potential returns in 2024, investors may want to consider looking beyond the mega-cap names and exploring the opportunities in this overlooked segment of the stock market.
