Markets have come a long way since the March lows, but we believe there may be more room for stocks to run. Given the impressive economic recovery to date and improving underlying technical and fundamental conditions, we think small cap stocks in particular may have attractive growth potential. Despite election and COVID-19-related risks, we see further gains ahead.
Not Out of the Woods, But Improving
The significant impact of COVID-19 on the US economy has created unprecedented levels of uncertainty for investors, with a heated election as the cherry on top for 2020. Investors have had a lot to digest since markets bottomed in March, and the virus is not yet under control, but the US economy is certainly in a much better place today than it was in the spring. While we previously have favored large cap stocks due to their strong balance sheets and resilient earnings during this recession, we highlight three reasons we have been warming up to small cap stocks.
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The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet.
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