Winds of change are in the air. Years of rising interest rates to tame the inflation beast are slowly reversing as central banks loosen monetary policy. Recession fears are receding as the “hard landing” narrative has given way to the “soft or no landing” scenario. The headwinds that once drove investors away from small cap stocks are turning into tailwinds making this asset class highly desirable once again as mega and large cap stock prices climb a wall of worry. (“How much higher can they possibly go before a course correction?”) According to Morningstar Direct, small-cap ETFs took in almost triple the amount invested in 2023. Wall Street analysts’ earnings estimate on stocks in the S&P SmallCap 600 is expected to rise 22.1% versus 14.8% for those in the S&P 500 next year. This bodes well for investing in small cap companies. However, while small caps offer the potential for outsize returns, as has been the case historically, they also come with unique risks and challenges for investors.

Winds of change are in the air. Years of rising interest rates to tame the inflation beast are slowly reversing as central banks loosen monetary policy. Recession fears are receding as the “hard landing” narrative has given way to the “soft or no landing” scenario. The headwinds that once drove investors away from small cap stocks are turning into tailwinds making this asset class highly desirable once again as mega and large cap stock prices climb a wall of worry. (“How much higher can they possibly go before a course correction?”) According to Morningstar Direct, small-cap ETFs took in almost triple the amount invested in 2023. Wall Street analysts’ earnings estimate on stocks in the S&P SmallCap 600 is expected to rise 22.1% versus 14.8% for those in the S&P 500 next year. This bodes well for investing in small cap companies. However, while small caps offer the potential for outsize returns, as has been the case historically, they also come with unique risks and challenges for investors.

i. Grantham, Jeremy, April 18, 2012, My Sister’s Pension Assets and Agency Problems, GMO.com
ii. Housel, Morgan, 2020, The Psychology of Money, Petersfield, Harriman House
iii. Gaddis, John Lewis, 2018, On Grand Strategy, New York, Penguin Press

This View from Burgundy is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints, or financial needs. Under no circumstances does this View from Burgundy suggest that you should time the market in any way or make investment decisions based on the content. Select securities may be used as examples to illustrate Burgundy’s investment philosophy. Burgundy portfolios may or may not hold such securities for the whole demonstrated period. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. This View from Burgundy is not intended as an offer to invest in any investment strategy presented by Burgundy. The information contained in this post is the opinion of Burgundy Asset Management and/or its employees as of the date of publishing and is subject to change without notice. Please refer to the Legal section of Burgundy’s website for additional information.

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