Five charts to start your day

Is the small-cap rally might be part of a larger rotation?

In 1794 Napoleon described England as “a nation of shopkeepers”. The phrase was generally a positive one. Hard-working, local, small-scale productive enterprises provide jobs and serve the community. Small-cap stocks are an important part of a vibrant economy.

Recently in the US, Small-cap stocks have surged ahead of their larger counterparts after years of moderate performance. This unexpected turn has left investors questioning whether this could be the beginning of a new trend.

The valuation gap between small and large caps remains significant, with small caps trading at a considerable discount. One theory for why this is happening is that private equity acquisitions have reduced the number of high-quality opportunities in the small-cap space.

However, the rally being witnessed today appears to go beyond small caps and seems to benefit value stocks more generally. Traditionally rate-sensitive sectors like financials and real estate also appear to have benefitted and have led the charge.

This suggests that the small-cap rally might be part of a larger rotation away from growth stocks, which have dominated the market ever since the end of the Great Financial Crisis in 2007.

The question is whether this represents a fundamental shift in the market or whether this is merely a temporary rebalancing.

Source: Financial Times

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• Small caps appear to outperform the mega techs

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• How did the UK vote in the 2024 election

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