Small-Cap Potential: Fundstrat’s Insights for 2024

Fundstrat, a prominent investment research firm, has shifted the spotlight to an often overlooked area of the stock market, predicting significant gains of up to 50% in 2024. While many investors are focused on mega-cap names, Fundstrat believes that small-caps hold untapped potential for substantial returns this year.

Tom Lee’s Top Idea

Tom Lee, head of research at Fundstrat, emphasized small-cap stocks as the top idea for 2024, citing a minimum upside of 50%. Lee’s confidence in this segment stems from its current underappreciated status in the market, where even contrarian views can find substantial opportunities for growth.

Fundamental Reasons

Lee outlined three fundamental reasons driving the bullish outlook on small-cap stocks:

1. Revenue Growth Potential: Small-cap firms in the Russell 2000 index are expected to experience significant revenue growth, surpassing the S&P 500’s growth rate due to potential rate cuts by the Federal Reserve in 2024. Lee highlighted the faster revenue growth of small-caps, noting a 140 basis points advantage over larger companies, translating to nearly 25% faster growth.
2. Earnings Growth: Lee projected a robust 19% growth in earnings per share (EPS) for small-cap stocks, outpacing the 12% EPS growth of the S&P 500. He attributed this advantage to the lower price-to-earnings (P/E) ratios of small-caps, making them more attractive and affordable to investors.
3. Institutional Investor Shift: Institutional investors have been reducing their exposure to small-cap stocks for years. Lee sees this trend reversing, with institutions potentially returning to small-caps in search of higher returns. This shift in sentiment could fuel sustained gains for small-cap companies.

Historical Parallel and Long-Term Outlook

Lee drew parallels between the current small-cap market conditions and those of 1999, highlighting a similar launch point for a prolonged period of outperformance. He noted that from 1999 to 2011, small-caps consistently outperformed by an annual average of 650 basis points, culminating in a cumulative 113% increase.

Overall, Fundstrat’s bullish stance on small-cap stocks is grounded in the potential for accelerated revenue and earnings growth, coupled with a favorable shift in institutional investor sentiment. These factors, reminiscent of past market dynamics, suggest an optimistic outlook for small-cap investments in 2024.