Donald Trump’s second term as president could drive significant gains in small-cap stocks, according to Tom Lee, head of research at Fundstrat. Lee believes small-caps could outperform the broader market by more than 100% over the next couple of years. “I think small-caps could, over the next couple of years, outperform by more than 100%,” Lee said on Friday.
He had previously predicted that small-caps had 40% upside for the remainder of the year. Small-cap stocks have already performed well this year, with the index up 18%. However, the index is trading at around 10 times forward median earnings, a lower valuation compared to the S&P 500, which is trading at around 17 times forward earnings.
This disparity could signal further upside for small-caps, according to Lee. Lee also sees potential gains for other assets likely to benefit from Trump’s policies, such as bitcoin, which he predicts could climb past $100,000 by the end of the year.
Small-caps future under Trump’s policies
The S&P 500 could rally another 5%-10% through year-end, mirroring the size of previous post-election rallies. “Part of the reason investors are feeling so optimistic is that President Trump is entering office again, but this time with more knowledge of how to build a cabinet and a team, making this term potentially more market-friendly,” Lee added. Despite the optimism, some experts have warned that certain aspects of Trump’s economic agenda could result in higher interest rates for a prolonged period.
Nevertheless, the overall sentiment remains positive, with many investors betting on substantial market gains in the near future. Eric Johnston, senior managing director at Cantor Fitzgerald, also expects small caps to continue their outperformance into the year-end. In a bi-weekly report, Johnston suggests that market conditions are favorable for these smaller companies, which often rely more on the U.S. economy than their larger counterparts.
As we approach the year-end, investors might consider adjusting their portfolios to take advantage of this potential growth in the small cap sector. However, it is important to keep in mind that while the outlook for small-caps appears promising, there are always risks associated with investing in the stock market.
