Small and Mid-Cap Stocks Poised for Outperformance: Citi Analysts Reveal Key Factors

Small- and Mid-Cap Stocks Poised for Potential Gains, Citi Analysts Say

Recent market trends suggest that small- and mid-sized stocks may be on the verge of outperforming their larger counterparts, according to Citi analysts. Several factors are contributing to this potential shift in market dynamics, including earnings expectations, political considerations, and liquidity concerns.

Earnings growth expectations for small- and mid-cap stocks are currently lower than those for larger companies, setting a more achievable bar for these smaller firms. Analysts predict earnings-per-share growth for small and mid-caps to outpace that of S&P 500 companies in the coming quarters. This lower threshold could lead to larger market rewards for earnings surprises in small- and mid-cap sectors.

The possibility of a Trump presidency is also influencing market projections for smaller stocks. During Trump’s previous term, small caps demonstrated strong performance. The proposed tariffs under a potential Trump administration could disproportionately benefit small caps, which have historically shown resilience to tariff-related risks. Current market expectations for small caps in the event of a Trump win remain low, potentially creating opportunities for investors.

However, liquidity concerns continue to present challenges for small-cap investments. The trade-off between liquidity and potential alpha opportunities is a key consideration for investors. Many remain hesitant to shift investments from large caps to smaller, less liquid stocks despite the potential for higher returns.

Citi analysts suggest that carefully managed investments in smaller stocks could offer a way to balance risks and capitalize on potential gains. As market conditions evolve, investors are advised to closely monitor these trends and adjust their strategies accordingly.