Small Caps Pick Up Speed
​Small cap stocks have been picking up speed in earnings per share (EPS) growth compared to large cap stocks and many anticipate that this trend will continue. Developing tailwinds support these expectations of future gains for small cap stocks.

  • The EPS of the Russell 2000 Index has grown faster than the EPS of the Russell 1000 Index over the past several years. This year the growth of small cap stocks has gathered steam and is expected to continue accelerating in 2018, nearly tripling the estimated EPS growth of large cap stocks.

  • On September 27th, 2017, details of President Trump’s tax blueprint were revealed, indicating plans to cut the corporate tax rate to 20%. Future tax reform may accentuate the divergence between small cap and large cap EPS growth because small cap companies generally conduct more of their business domestically than large cap companies and are better primed to benefit from fiscal stimulus (see Alger On the Money “Small Caps May See Big Gains Under New Tax Proposals”).

  • Additionally, small cap stocks have historically outperformed large cap stocks in rising rate environments such as the current one facing the market.

  • Investors may find small cap stocks attractively valued at this time. The price-to-sales ratio of small cap stocks relative to large cap stocks dipped to a 10-year low of 0.61 at the end of August 2017. This significant discount may mean a buying opportunity is at hand.

The Russell 2000 index is an index measuring the performance of approximately 2,000 small cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 1000 index is an index of approximately 1,000 of the largest companies in the U.S. equity markets and is a subset of the Russell 3000 Index. Investors cannot invest directly in any index. Index performance does not reflect deductions for fees, expenses or taxes.

The views expressed are the views of Fred Alger Management, Inc. as of October 2017. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

The price-earnings ratio (P/E Ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. S&P 500 Index: An index of large company stocks considered representative of the U.S. stock market. Investors cannot invest directly in any index. Index performance does not reflect deduction for fees, expenses, or taxes. Investors cannot invest directly in any index.

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