Barron’s highlights big rebound potential for small caps
Barron’s argues that the recent drop has made small-cap stocks so cheap that any positive economic news could spark a recovery. / Photo: orhan akkurt / Shutterstock.com
Barron’s notes the potential for a turnaround in small-cap stocks. The S&P SmallCap 600, which tracks small and mid-sized companies, is now so undervalued versus last year’s highs that any piece of positive news could send the index soaring. Barron’s believes now could be the time for investors to take advantage of the decline in small-cap valuations.
Details
Small-cap companies are in the short line for a turnaround, Barron’s writes. The S&P SmallCap 600 has plunged nearly 24% from its peak of 1,544.66 points, reached on November 25. More than 9% of that drop came after April 2, when Trump announced new sweeping tariffs. That’s a much steeper decline than the S&P 500, the benchmark for large-cap stocks, which has fallen just under 12% since November 25 and around 7% since April 2.
The drop has made small-cap stocks so cheap that any positive economic news could spark a recovery, Barron’s argues. “Small-caps are ‘vulnerable’ to upside at the slightest of positive headlines,” Julian Emanuel, strategist at investment bank Evercore, was quoted in the article. He is advising clients to increase their exposure to small caps.
Possible triggers for a small-cap rally
Barron’s outlines several factors that could soon trigger a rally in small caps:
— Signs of better profits. Small-cap stocks are typically more volatile and carry more risk than large-cap peers, which means they could rally more during “bright days for the broader market.”
— A potential rate cut from the Fed. While the Fed lowered rates three times last year, it has paused softening policy in 2025 due to inflation concerns. “Even if the economy falters, the Federal Reserve could cut interest rates,” Barron’s notes. The logic is that falling consumer spending could drive inflation lower, leading to economic stabilization and rate cuts — which in turn would boost small caps.
— A corporate tax cut (possibly for companies that produce goods in the U.S.), which Trump promised during his reelection campaign. If that is implemented, smaller companies would see a larger earnings boost than large companies, Barron’s writes. “Small Caps… would appear to be a beneficiary of an “America First” agenda,” Emanuel confirms.