Summary of Key Points from J.P. Morgan's Long-term Strategy on Small and Mid Caps Industry Overview - The analysis focuses on the long-term performance of small, mid, and large-cap companies, particularly in the context of the U.S. market and its structural forces affecting returns [2][4][10]. Core Insights and Arguments 1. **R&D Intensity and Firm Size**: - Business-funded R&D intensity tends to favor larger firms, creating barriers to entry for smaller firms, thus increasing corporate concentration [2][11]. - Conversely, government-funded R&D benefits smaller firms by reducing barriers to entry, as evidenced by research showing small firms gain more from R&D grants [2][19]. 2. **Globalization Effects**: - Global integration has generally favored large firms, as they can build global supply chains and engage in tax arbitrage more effectively than smaller firms [2][26]. 3. **Antitrust Policy Impact**: - Weaker antitrust enforcement since the 1970s has coincided with a decline in the small-cap premium, although this is not seen as a primary driver of performance differences [2][31]. 4. **Interest Rates**: - Falling interest rates have historically favored larger firms more than smaller ones, as larger firms benefit from greater declines in borrowing costs and increased debt issuance [2][33]. 5. **Valuation Trends**: - Valuations have shifted in favor of small caps over the past 15 years, although this trend is less pronounced outside the U.S. [2][40]. 6. **Long-term Performance Expectations**: - Small and mid caps are expected to outperform in low return environments, supported by their long-term low beta characteristics [2][52]. - If business-funded R&D continues to grow, long-term returns on small, mid, and large caps may become comparable, with a slight favor towards small and mid caps [2][72]. 7. **AI as a Risk Factor**: - The growth of AI may disproportionately benefit larger firms, potentially altering the expected performance dynamics between small and large caps [2][83]. Additional Important Insights 1. **Historical Performance**: - Small and mid caps outperformed large caps until the 1980s, with large caps dominating performance in the last decade [2][4]. 2. **Structural Forces**: - The analysis identifies several structural forces influencing returns, including R&D intensity, trade intensity, interest rates, and past performance [2][53]. 3. **Future Projections**: - The expected long-term returns across size deciles are projected to be narrow, with small and mid caps potentially outperforming slightly in the coming decade [2][77]. 4. **Global Context**: - Outside the U.S., the structural support for large caps is weaker, and while some forces favor small caps, relative valuations remain neutral [2][85]. 5. **Monitoring Recommendations**: - Future changes in trade intensity, R&D funding, interest rates, and antitrust enforcement should be monitored as they could impact the relative performance of small and mid caps [2][83]. This summary encapsulates the key findings and insights from J.P. Morgan's analysis on the long-term performance of small and mid-cap companies, highlighting the structural forces at play and their implications for future investment strategies.