Small-cap index to surge nearly 25% in 2025 — Freedom Broker

The S&P 600 index, which tracks small- and mid-cap companies, is expected to rise nearly 25% in 2025, outperforming the S&P 500, which represents the largest issuers, according to Freedom Broker. Analysts attribute this to increased appetite for riskier assets, including small-cap stocks, under Donald Trump’s presidency.

Details

Freedom Broker predicts the S&P 600 will climb 25% in 2025, reaching 1,780 points, while the S&P 500 is projected to gain 11%, according to a strategic report available to the publication. In 2024, the S&P 500 rose approximately 23%, the S&P 600 just under 7%, and the Russell 2000, another index tracking small- and mid-cap companies, grew 10%. However, Freedom analysts note that in the fourth quarter, the small-cap segment outperformed the broader market.

Freedom Broker anticipates an extended rally and improved profitability among small-cap companies. The EPS forecasts for S&P 600 companies were revised downward from 16.8% to 4% by the end of the fourth quarter 2024, with a significant recovery expected in the second quarter 2025.

The recovery in financial metrics for small-cap companies, which typically operate domestically, will be supported by strengthening consumer demand in the U.S., analysts explain. Appetite for riskier assets is also expected to benefit from Trump’s presidency, particularly his promised corporate tax cuts and trade policies. Freedom Broker highlights micro-cap issuers as primary beneficiaries of tax reforms.

“The ‘Trump effect’ will likely persist in the medium term, with corporate tax reductions and the president’s protectionist policies bolstering small businesses in the local market,” Freedom Broker explanes.  

Other drivers for small-cap companies include a declining inflation trend and expectations of continued rate cuts.

Risks for investors

Freedom Broker identifies monetary policy as a key risk for small-cap investors. Expanding fiscal deficits could raise inflation expectations, potentially keeping rates at higher levels, analysts warn. This would negatively impact issuers with high debt burdens and floating-rate loans.

The Fed has already signaled that it will reduce rates twice in 2025, instead of the previously expected four times. This announcement caused a decline in U.S. stock indexes, with the Russell 2000 suffering the most, plummeting 4.4% on December 18, the day of the Fed’s statement.

Insights from other analysts
Freedom Broker isn’t alone in predicting strong growth for small-cap companies. In December Piper Sandler’s chief market technician Craig Johnson forecasted that the Russell 2000 would outpace the S&P 500 in 2025 and could reach new highs. Jefferies and Fundstrat strategist Tom Lee shared similar views, with Lee issuing his forecast shortly after the U.S. presidential election, according to CNBC.