Small caps hit record high after Trump victory
The day after the U.S. election, Wednesday, November 6, the S&P SmallCap 600 hit an all-time high, while the other main small-cap index, the Russell 2000, reached a three-year peak. SentimentTrader analyst Jay Kaeppel notes, as reported by MarketWatch, that the near-term question for traders will be whether it’s time to consider allocating away from large caps and into small caps.
Details
- The S&P SmallCap 600 surged 6.0% on Wednesday to an all-time high.
- The Russell 2000 rose 5.8% the same day, reaching its highest level in three years. It is now just 2.2% off its all-time record, notes Freedom Finance Global analyst Georgy Timoshin.
Early on Wednesday, Republican Donald Trump was declared the winner of the U.S. presidential election. His pro-business stance, with a focus on tax cuts and strengthening the competitiveness of U.S. companies, could foster a more favorable investment climate, according to ClearBridge Investments strategist Jeff Schulze, as reported by Reuters.
“The market believes a Trump presidency will unleash animal spirits and give a boost to growth in the short-term through some relief on corporate taxes and deregulation,” says Frédérique Carrier, head of investment strategy for RBC Wealth Management, as quoted by the Economic Times.
One of Trump’s campaign promises is to lower the top corporate tax rate from 21% to 15%, which could drive additional EPS growth as early as 2026. Timoshin adds that tax cuts, combined with other fiscal stimulus, could significantly juice the economy. Small-cap stocks stand to benefit from possible import tariffs, particularly on Chinese goods, which would make small and medium-sized businesses more competitive in the U.S. market.
Small caps outperformed large caps following each of the last three presidential elections, points outs SentimentTrader’s Kaeppel, as reported by MarketWatch.
Today, Thursday, November 7, the Fed will decide whether to cut rates further. Recall that in September, it delivered the first rate cut since 2020, cutting by 50 basis points. By mid-October, this had helped small-cap indexes to reach highs not seen since November 2021. Lower interest rates are generally good for small companies, which tend to carry higher debt loads and often rely on floating-rate loans.
Kaeppel suggests that traders may reconsider large-cap growth stocks in favor of small-cap and value stocks. While the former allow investors to achieve above-market returns, the latter offer steady appreciation over time.
For investors
Some estimates project that a Trump presidency could increase the U.S. budget deficit by $775 billion annually over the next decade, notes Freedom Finance Global’s Timoshin. This would suggest sustained inflationary pressure, meaning a rebound in inflation in 2025-2026 and thus elevated rates by the Fed. Such an outcome could dampen the flow of capital into riskier assets, including small-cap stocks, Timoshin concludes.
