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American small caps: investment opportunities in the new economic environment

The current context of small caps

With the election of Donald Trump and his economic policies, the American stock market has shown signs of recovery, especially for small companies, known as small caps. These companies, more oriented towards the domestic market, can benefit from a favorable economic environment, as they are less exposed to global fluctuations and commercial tensions. Their ability to adapt quickly to market dynamics makes them an attractive option for investors.

Historical performance and future prospects

Looking back, in the month following Trump’s victory in 2016, the Russell 2000, the small-cap index, outperformed the S&P 500 by almost 11%. Even if such a strong response is not expected this time, the Republican victory creates a more favorable environment for these companies. In addition, the Federal Reserve’s easing of rates offers additional support, as small caps had been more affected by rising rates in recent years
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Competitive advantages of small caps

Small businesses tend to be more cyclical and diversified, meaning they can benefit from an economic recovery. Investing in small caps offers a differentiated exposure compared to large caps, which often have a greater international exposure. This is particularly relevant in a context in which the American economy has demonstrated surprising resilience, moving away from recessionary forecasts and considering a soft-landing scenario
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Valuations and Merger Opportunities

Currently, small caps trade at a discount compared to large caps and their historical average, making valuations attractive to investors. If there is a revaluation of the multiple, this could encourage small caps to outperform. In addition, the drop in rates could stimulate an increase in mergers and acquisitions, as many companies are trying to take advantage of the available cash
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Investment strategies and research

Investing in small caps requires in-depth analysis and an active approach. Small businesses, although they have higher profit growth potential, are often less followed by analysts. Identifying undervalued opportunities through in-depth research and fundamental analysis is crucial. Our management team is committed to maintaining constant relationships with portfolio companies, to better understand their performance and future prospects
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