Stocks of Smaller Companies Struggle While Large-Cap Stocks Soar

Stocks of smaller companies have had a plain old bad year. They’re particularly cheap now, and their fundamentals may very well improve soon.

That is no surprise. The S&P 500 is weighted by market capitalization, so the enormous tech companies that have been rallying in response to optimism about artificial intelligence have helped the overall benchmark to rise. Earnings have been an issue for small-caps. Analysts expect aggregate sales this year for the S&P 600 to drop almost 1% year over year, according to FactSet. That would send earnings per share down 14% as profit margins drop.

All that pessimism means small-cap companies should have an easier time beating bottom-line expectations, especially if the economy avoids recession and the Federal Reserve lowers interest rates to keep growth alive.

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