U.S. small-cap indices have pulled ahead of large-cap indices over the past three to six months, and through the first half of 2025, we anticipate further catch-up in both stock prices and, for higher-quality small caps, earnings growth. We believe government spending, tax cuts, trade realignments, deregulation and conducive industrial policies will boost US smaller businesses.
|
Average Russell 2000 Performance,
% During Election Cycles Since 1979 
Source: RBC Capital Markets Research, as of December 2023. |
US Small Cap - Russell 2000 Index
YTD as of 13 December 2024 
Source: Bloomberg based on Neuberger Berman analysis. |
- US small-cap stocks, as represented by the Russell 2000 Index, surged 6% immediately after the election, demonstrating strong investor confidence in small-cap opportunities under the Trump administration.
- With an 85% correlation to capital expenditure growth, small caps with their primary domestic focus, are well-positioned to benefit from anticipated increases in domestic investment and infrastructure spending in an ‘American First’ mantra, driving future growth potential.
- Potential regulatory easing and corporate tax cuts are expected to disproportionately benefit small-cap firms, which typically face higher compliance costs and pay closer to the full U.S. corporate tax rate, significantly improving their bottom lines.
- In recent years, benchmark construction in small caps’ indices have been limiting given their lower weighting in technology and higher weighting in tech and industrials The policies being discussed are likely to change that.
With current market pricing not fully reflecting these anticipated policy benefits, combined with relative valuations at a historical high, the stage is set for the long-awaited sustained revival in US small caps in 2025.
