Small Caps expected to shine in 2024 

Brad McGill, Portfolio Manager for the Aperture Discover Equity strategy (Aperture Investors, part of Generali Investments ecosystem)

Over the past decade, small caps have meaningfully lagged large caps – largely due to the success of a handful of mega cap tech stocks. As most are aware, this dominance of a few mega cap names has led to a historically high level of market concentration not seen since the 1970s. As a result, investors have not needed to move down the market cap spectrum in search of returns like they have historically. This, in our view, has caused an overreliance on passive index mirroring strategies and as a result, participation in the asset class has declined. This has left a somewhat ignored market in our opinion, which we believe creates a tremendous opportunity for patient investors. As a starting point today, small cap valuations are around 20% less expensive on average for profitable companies compared to large caps, and they’re also at historic lows, representing what we believe is a strong buying opportunity.

The last couple of years has been especially challenging for small caps due to tightening monetary policies, as small cap indices tend to be more levered than large caps and are viewed as more economically sensitive. However, we’re now seeing signs of a shift where small cap performance is improving. The US economy is still healthy by most measures – as is the labor market – and while there are signs of deceleration, the expectation for Fed rate cuts has typically supported small cap performance.

Looking beyond market dynamics, we see accelerating earnings drivers across many areas of the small cap market. While many are focused on the large cap beneficiaries of AI – technology is traditionally empowering for smaller companies as well – new sources of revenue and operational efficiency will be furthered by advancements in technology.