Earnings, M&A Potential Have Small-Cap Investors Turning Bullish

Core Insights - Small-cap stocks are expected to outperform larger companies in terms of earnings growth, with analysts predicting a shift in performance dynamics [1][4] - The S&P 600 Index's profits are projected to grow by 14% in Q3, surpassing the S&P 500's nearly 12% growth rate [2] - The valuation gap between small and large-cap stocks is at its steepest in 40 years, potentially leading to increased M&A activity in the small-cap sector [5][6] Earnings Growth - Small-cap companies are anticipated to deliver faster earnings growth compared to their larger counterparts, with a projected 14% growth for the S&P 600 Index in Q3 [2][4] - Interest rate cuts are expected to further enhance profits for small firms, which typically carry higher debt burdens [4] Valuation and M&A Activity - The current valuation of small-cap stocks is described as "historically cheap," prompting expectations of a surge in M&A activity, potentially reaching the highest levels in decades [6] - The underperformance of small-cap stocks since 2022 has created attractive pricing relative to large caps, making them appealing targets for corporate deals [5][6] Market Performance Comparison - The Russell 2000 has gained 10% this year, while the S&P 500 has advanced by 17%, highlighting a significant performance gap [6] - Since the end of 2022, the S&P 500 has nearly doubled the Russell's nearly 40% gain, emphasizing the stark underperformance of small-cap stocks [6]