3 reasons why an overlooked sector of the stock market is expected to rise 50% this year, according to Fundstrat

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  • Fundstrat’s Tom Lee says small-cap stocks will outperform the S&P 500 by at least 50% through 2024.

  • Small-cap stocks are expected to outpace large-cap earnings, valuations, and revenue growth in 2025.

  • Lee highlighted similarities to 1999, when small-cap stocks outperformed by 650 basis points annually, up 113% over 12 years.

Fundstrat said investors focusing on large-cap stocks could be missing out on the potential of the more understated corners of the stock market, which could unleash huge returns in 2024.

“Our top thought for 2024 is small-cap stocks, where we see room for at least 50% upside,” Tom Lee, head of research at Fundstrat, said in a note on Wednesday. He noted that small-cap stocks have room for at least 50% upside. Stocks are so scorned by the market that even “Wrong Charlie” can confidently bet on their success.

Lee crystallizes his 2023 stock market predictions and offers three fundamental reasons to take a closer look at this unpopular segment of the booming U.S. stock market.

First, Lee noted that Russell 2000 companies will experience significant revenue growth, surpassing the S&P 500 by a significant margin in 2025 compared with 2024, thanks to The Fed may cut interest rates This year.

“Now, this might surprise you, but small caps actually have faster revenue growth. 6.9% compared to 5.5%, which is 140 basis points faster or nearly 25% faster, and that’s true for each quintile .”Lee said in a video About the topic of this week’s post.

Secondly, Lee also emphasized the earnings growth potential of small-cap stocks, expecting earnings per share to grow 19%, exceeding the S&P 500’s 12% earnings per share growth. Large-cap stocks look cheaper to investors.

Finally, the Fundstrat CEO noted that institutional investors have been selling off small-cap stocks for years, making them ripe for trading.

“[M]”While small caps have begun to outperform, large-cap investor allocations to small caps remain at multi-decade lows. We believe this performance chase is a key factor in small caps sustaining gains,” he added.

Lee writes that the conditions for small-cap stocks to be primed for a big rally mirror what happened in 1999, when the sector began a streak of outperformance that lasted more than a decade.

“1999 was also the starting point of 12 consecutive years of outperformance. From 1999 to 2011, small-cap stocks outperformed the market by 650 basis points annually, rising 113% cumulatively.”

Read the original article business insider

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