Gloom around small-cap stocks

The Star Early Edition - - INTERNATIONAL - Car­o­line Valetkevitch

OP­TI­MISM is sour­ing around small-cap stocks for some in­vestors, with a host of fac­tors con­spir­ing to up-end gains that have taken them to record highs.

Small-caps, which led the mar­ket’s rally just af­ter the Novem­ber 8 elec­tion of Don­ald Trump as US pres­i­dent, are fac­ing weak earn­ings fore­casts, lit­tle progress on tax re­form and re­cent out­flows.

“We have downside risks here. Earn­ings num­bers aren’t great, and val­u­a­tions are… pretty rich,” said Steven DeSanc­tis, equity strate­gist at Jef­feries. In­vestors had ex­pected the ad­min­is­tra­tion of Repub­li­can Trump, with his prom­ises of ag­gres­sive tax cuts and a health­ier US econ­omy, would be a boon for small-caps, which tend to be more do­mes­ti­cally fo­cused.

Doubts

Repub­li­cans so far have been un­able to push through bills to re­peal and re­place the Af­ford­able Care Act. That has raised doubts about the like­li­hood of any tax re­form this year. Small­caps have higher ef­fec­tive tax rates – about 32 per­cent ver­sus 26 per­cent for large-caps, a note from Nu­veen As­set Man­age­ment showed.

The per­for­mance of both the Rus­sell 2000, a widely used gauge for small-caps, and the small-cap S&P 600 has lagged that of large-caps so far this year, but the Rus­sell is up 20.3 per­cent since the elec­tion com­pared with a gain of 15.3 per­cent for the S&P 500. All three in­dexes hit record highs in re­cent ses­sions, just as the earn­ings re­port­ing pe­riod was get­ting un­der way.

In the small-cap en­ergy sec­tor, ser­vices and equip­ment com­pa­nies con­tinue to be af­fected by project cut­backs by larger com­pa­nies. The small­cap out­look is in con­trast to ex­pec­ta­tions for an­other quar­ter of strong profit growth for the S&P 500 and a sharp year-overyear jump in large-cap en­ergy.

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