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May 06.2025

2 Minutes Read

The Turning Cycle: Why Small Caps Are Set for a Comeback

Great Dane and Dachshund showcasing size contrast like small caps vs large caps.

Understanding the Dynamics: Small Caps vs. Large Caps

In a landscape where small-cap stocks have been overshadowed by their larger counterparts, it's essential to reconsider their potential in an investment portfolio. Despite eight consecutive years of underperformance, small-cap equities are poised for a comeback, as history and market conditions suggest a turning point is on the horizon.

Why Small Caps Matter in Your Portfolio

Historically, small-cap stocks undergo cycles of outperformance versus large-cap stocks. Over extended periods, such as from 1955 to 1962, and again from 1989 to 2005, there have been phases where small caps lagged, only to rebound impressively. As we find ourselves in the 12th year of a current underperformance cycle, many investors are beginning to question the viability of small caps altogether. However, a closer look indicates that all cycles eventually turn.

The Effect of Interest Rates on Small Caps

Interest rates play a critical role in the health of small caps, with a strong correlation found between rising interest rates and the migration of small-cap stocks into the large-cap arena. When interest rates increase, small-cap stocks often migrate faster, indicating a thriving market. The reverse trend, characterized by unusually low interest rates and resulting government policies from 2001 to present, has hampered small-cap migration rates.

The Value Proposition of Small Caps

Investors should not disregard the strategic allocation towards small-cap equities, especially during economically challenging times when larger firms face pressures from global uncertainties. Positioning these undervalued companies allows investors to tap into potentially higher returns as they rebound.

Final Thoughts: Time for an Investment Reassessment

Understanding the cyclical nature of small versus large caps and the economic factors at play is crucial for investors. As conditions shift, the time may be ripe to reassess small-cap investments. The revival of small caps might not just indicate an investment opportunity but a strategic necessity.

Investments & Wealth Building

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The Turning Cycle: Why Small Caps Are Set for a Comeback

Understanding the Dynamics: Small Caps vs. Large Caps

Why Small Caps Matter in Your Portfolio

The Effect of Interest Rates on Small Caps

The Value Proposition of Small Caps

Final Thoughts: Time for an Investment Reassessment

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