Noble Capital Markets says positive market sentiment 'brings opportunity to small-cap investors'

The expected positive effect from Donald Trump’s policies has yet to materialize for smaller companies. / Photo: Shutterstock

Noble Capital Markets has identified three key factors that should buoy small-cap stocks moving forward. While the broader market reacts to macroeconomic developments like tariffs and trade policy, the small- and micro-cap space stands apart as a unique opportunity for investors, in the investment bank’s view. Recently, the Russell 2000 index, which tracks small- and mid-cap stocks, has given up more than 5% since peaking on November 25, while the S&P 500 reached new highs in January.

Details

The current market environment is creating fertile ground for small- and micro-cap companies, Noble Capital Markets writes. It cited three factors for optimism. The first is falling interest rates: Lower borrowing costs particularly benefit smaller businesses. The second factor is the prospect of tariffs: As outlined by President Donald Trump, more and higher tariffs are expected to hit larger companies with global exposure harder, while small-cap companies, typically focused on the domestic market, may face less stiff headwinds. The third factor is surging IPO activity: This signals optimism about the economy and creates more investment opportunities. There was a 46% jump in the number of IPOs in the U.S. in 2024, according to Stockanalysis.com. As of Friday, January 24, 18 companies had gone public on U.S. exchanges in the new year, versus a total of 15 listings in January last year.

The current sentiment in the market gives smaller companies an opportunity to showcase their potential and investors a better chance to identify high-growth companies at attractive valuations, Noble Capital Markets noted.

“As these companies grow and mature, they provide a dynamic pathway for wealth creation and portfolio diversification… As the marketplace evolves, those who seize the moment stand to reap significant rewards,” in the view of Noble Capital Markets.

What others have to say

The new year has been challenging for small-cap stocks. The Russell 2000 index is down more than 5% since November 25, when it peaked at 2,442.09 point on optimism following Trump’s election. Meanwhile, the S&P 500 hit a record high of 6,118.71 points on January 23.

Analysts remain cautiously upbeat about the outlook for small caps. Over the last month, every Russell 2000 sector is now higher over the past month after being “deeply in the red” not that long ago, “with further gains looking likely,” Rob Ginsberg, a strategist at Wolfe Research, told CNBC. If the index breaks through its 2,450 points resistance level, “the group could go on a massive run,” he added.
Trump’s return to the White House presents opportunities for smaller companies, but “that thesis for outperforming probably hinges more on a favorable interest rate environment,” Yung-Yu Ma, the chief investment officer at BMO Wealth Management, told Reuters. Fed policy indeed remains a key risk for small-cap investors, analysts at Freedom Broker noted in their 2024 strategic review. Nevertheless, they project the S&P SmallCap 600 to rise 22% in 2025 to 1,780 points, versus just over 10% expected growth for the S&P 500, which they think will reach 6,760 points. The Freedom Broker analysts also believe small caps are poised to benefit from Trump’s promised corporate tax relief and trade policies. These measures are seen as bolstering domestic-oriented businesses.