Small-cap stocks have enjoyed a stellar 2024, with the S&P 600 index soaring more than 14% year-to-date, driven by optimism surrounding President-elect Donald Trump’s fiscal policies.
This performance marked a significant milestone for the index, which recently closed at a record high of 1,544.
Small-caps benefited from their exposure to economically sensitive sectors such as financials and consumer discretionary, alongside limited reliance on technology compared to the S&P 500.
Trump’s proposed fiscal spending, estimated to inject tens of billions of dollars annually into the economy, fuelled investor enthusiasm.
The index, comprising companies with an average market capitalization of $3 billion, also stood to gain from expected tax cuts favouring domestic production.
Record inflows signal saturation
Net inflows into US small-cap funds have reached a record $30 billion this year, tripling last year’s figures, according to Bank of America.
However, history suggests this momentum may not sustain, as every year since 2010 that followed a record inflow to small-caps has subsequently experienced a net outflow.
This pattern indicates potential limitations for further investment into the asset class.
Dennis DeBusschere of 22V Research has cautioned against expecting further valuation gains in the near term.
“We don’t have another catalyst, near term, to justify a continued rerating higher in small caps…into year-end,” he noted.
This puts the onus on small-caps to deliver earnings growth that meets or exceeds expectations, a challenge given that current valuations already price in significant optimism.
Six small-cap stocks that could be resilient performers
To identify small-caps poised for sustained growth, analysts at Barron’s have focused on companies with strong earnings momentum and manageable valuations.
A recent screen of S&P 600 constituents by the publication highlighted 23 stocks meeting these criteria, including Steven Madden, Tripadvisor, Enova International, Allegiant Travel, LiveRamp Holdings, and Mr. Cooper Group.
Steven Madden, with a market cap of $3.2 billion, has consistently outperformed earnings expectations in seven of the past eight quarters.
The fashion brand anticipates mid-teens percentage growth in international sales, particularly in Europe, where it is gaining market share.
Analysts project the company’s revenue to grow by over 5% annually through 2026, with earnings per share (EPS) rising 12% annually, assuming stable product costs and marketing expenses.
Tripadvisor, valued at $2 billion, also stands out.
Despite competition from giants like Booking Holdings and Expedia Group, the company has achieved steady sales growth since 2020.
It derives revenue from hotel and airline advertising as well as restaurant reservations, supported by innovations like an artificial intelligence-powered assistant on its platform.
Analysts forecast annual revenue growth of nearly 7%, with adjusted EPS climbing 14% through 2026, thanks to improving margins and disciplined spending.
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