The benchmark index of American small caps, the Russell 2000, has lagged its blue-chip counterpart – the S&P 500 – over the past year. A year ago, the index looked pricey after a strong run, while the prospect of interest-rate hikes was a worry: bigger firms usually cope more easily with higher debt costs.
Now, however, tailwinds are gathering. Firstly, the minnows are more exposed to the strengthening US economy. They earn around 80% of their revenue in America, compared to the blue chips’ 50%. Big firms’ earnings are also being squeezed by the stronger dollar, and their profits have relied more on cost-cutting than growing sales.
Smaller companies have produced more impressive revenue growth, and this should endure. The upshot is that the small caps should grow profits by more than 10% this year, says UBS. The Russell 2000 looks set for a better 2015.