The Trump effect on small cap stocks
Since 2022, we have predicted that small cap stocks, especially those representing innovative businesses with pricing power, would do well in an environment of disinflation and positive economic growth.
Since the end of 2022, the U.S. Russell 2000 Index of small-cap stocks has risen 36 per cent, the U.S. S&P SmallCap 600 index is up 31 per cent, and the S&P/ASX Small Ordinaries index has risen 12 per cent.
Interestingly, most of the gains in the Russell 2000 Index (23 per cent) have been recorded since April this year, and the S&P SmallCap 600 is up 21 per cent over the same period. The bulk of the gains over the last two years have occurred in the last two or three quarters.
Given the disinflation/ positive gross domestic product (GDP) picture was no different before April and after April, we can put the acceleration down to something else. That something else may just be bets that a Trump election victory would be positive.
If so, why have U.S. small caps done well amid a Trump victory?
Answering that question may offer some insights into what happens next (for what it’s worth, I believe the small caps rally, which commenced in 2022, should continue into 2025, and we should reappraise the situation towards the end of 2025.
Domestic focus: Small-cap companies often derive a significant portion of their revenue from domestic operations. The last Trump administration emphasised policies that stimulated domestic economic growth, such as infrastructure spending and tax reforms, benefiting these companies.
Tax cuts and jobs act of 2017: Trump last reduced the corporate tax rate from 35 per cent to 21 per cent. Small cap companies generally paid higher effective tax rates compared to larger, multinational corporations. The reduction in taxes disproportionately benefited smaller companies, improving their profitability.
Deregulation efforts: The last Trump administration pursued deregulation across various sectors, reducing compliance costs and operational burdens. Due to these policy changes, small businesses, which have fewer resources to manage regulatory complexities, found it easier to expand and invest.
Trade policies: The focus on renegotiating trade agreements and implementing tariffs affected multinational corporations more than domestically oriented small cap companies. Large-cap companies with extensive international operations faced uncertainties and potential losses, whereas small caps were relatively insulated.
Economic growth and consumer confidence: The period saw steady economic growth and high consumer confidence levels. Increased consumer spending boosted revenues for small businesses that rely heavily on domestic markets.
Stronger U.S. dollar: A stronger dollar can negatively impact multinational companies by making exports more expensive and reducing the value of overseas earnings. With limited international exposure, small-cap companies were less affected by currency fluctuations.
Infrastructure initiatives: Proposed investments in infrastructure projects promised potential contracts and growth opportunities for smaller companies in construction, manufacturing, and related industries.
Together, the first time around, these factors created an environment where small-cap stocks could outperform their larger counterparts. Under a second Trump term, many investors believe the same is in store, which is why the Russell 2000 Index was up five per cent the day after Trump’s win. Of course, it’s important to remember honeymoons never last and stock performance is influenced by a variety of factors, including global market conditions, geopolitical conflict, investor sentiment, and, most importantly, profit growth.
For now, and until late 2025 (and excepting a war with China), I believe small caps will do well.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Robert Warren
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We all know investing in stocks and funds are not guaranteed and there are riscks involved as with all investments. The Montgomery small companies fund fell sharply not long after it floated to around 64 cents but with good management from Gary and Dom, the funds unit price was back above one dollar just over a year latter so a very good outcome and the 64 cent unit price would have been a great entry unfortunately I did not buy into the fund. As Roger always says buy low.
Not long after, Polen global small companies fund was released and it looked compelling, big mistake the same thing happened due to the market downturn the units fell to as low as 50 cents and have rarely been above 65 cents the investment managers are far from Gary and Dom and I don’t see the units improving for many years, it may be a good time to buy units now but if like me who bought at one dollar have little faith of ever getting a return on this investment, normally I would say okay I will buy more units but this fund as far as I am concerned has not been managed well that’s being kind. So as Roger says buy low and look for excellent managers not always easy as you can see.
Roger Montgomery
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The Montgomery Small Cap Fund fell to 78 cents during the Covid market collapse on a monthly closing basis and the team remain dedicated to outperformance.
Roger Montgomery
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I agree with you and I retain a significant investment in the Fund for that reason. The Polen team has had a major change at the helm. On the management front, Maneesh Singhal, CFA, has been appointed the Portfolio Manager of the Polen Capital Global Small and Mid Cap Growth strategy. Prior to joining Polen Capital, Maneesh gained experience at Lord, Abeth & Co, American Century Investments and more recently at CastleArk Management, where he was Co-Portfolio Manager and Senior Analyst. Maneesh has a B.A. in Biology and Economics from the University of Pennsylvania and is a CFA charterholder.
Youngju Ko also has just commenced as an analyst, and both new hires will enhance the team with the Polen Capital Global SMID Growth team returning to a traditional Polen Capital portfolio manager structure. Youngju has 20 years’ experience in the US, China and South Korea at Fidelity, Blue Pool Capital, Citadel and UBS. She earned a Bachelor of Science from Seoul National University in 2005 and an MBA from Columbia Business School in 2013.