Investing.com -- In a note to clients this week, Capital Economics strategists assessed the recent revival of small-cap stocks, noting it has been "broad-based" since the U.S. election.
"Every sector bar consumer discretionary has done better in the S&P 600 than in the S&P 500," said the firm, highlighting that it does not mean the pattern is bound to continue.
They pointed to the fact that after Trump won the election in 2016, U.S. small-cap equities underperformed for much of 2017.
"That turnaround probably partly reflected the fact that a major fiscal stimulus was delayed and ultimately scaled back," said Capital Economics. "With that in mind we think the chances of another major fiscal stimulus in 2025 are also slimmer than many seem to think.
The firm also notes that the Federal Reserve is loosening policy this time around, and small-caps have sometimes outperformed in easing cycles. However, they state that it is not always the case and that "looser Fed policy has often been motivated by a slump in the stock market or a recession."
The firm says the relative outperformance should be looked at through this lens.
Overall, the firm stated: "We aren't convinced the outperformance of U.S. small-cap equities since Donald Trump's victory on 5th November sets the tone for the first half of 2025."
In fact, the firm says they doubt small caps will start to fare better than large caps over a sustained period "until shortly before the bubble in AI bursts, which isn't something we envisage happening next year."