LIVE MARKETS-Small caps quiet outperformance may continue

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SMALL CAPS QUIET OUTPERFORMANCE MAY CONTINUE

The Russell 2000 index .RUT is edging up 0.13% on Wednesday and while it was a modest advance the small-cap index looked positively perky vs. the S&P 500's .SPX 0.96% decline on the day.

And it looks more impressive when you consider the RUT's year-to-date gain of more than 6% compared with the benchmark S&P 500's 0.7% advance. It should also be noted that the RUT touched an intraday record high on Tuesday before closing lower.

So what's the word on the Street? Can the little guys keep showing up the big guys?

Earlier this week, Steven DeSanctis, equity strategist and small-cap expert at Jefferies, noted that heading into the fourth quarter reporting season, numbers were cut for small- and mid-cap stocks and bumped up for large-cap. But he notes that in recent quarters small caps have beaten estimates by more than 800 basis points.

"Given this, we believe Q4 could be closer to Large," wrote DeSanctis. And while he says 2026 quarterly estimates are choppy in Small, with high expectations in Q4 2026, the analyst says he is confident that 2026 "will be better down cap & above average."

He sees small-cap earnings growing by 14.6% for 2026 and mid-cap growth at 14.2% with both surpassing large-cap growth of 13.8%. Sector-wise, DeSanctis sees the biggest 2026 earnings growth rate in communications services, up a huge 148.6%, while he expects consumer staples to lag with a 7% decline.

He notes that financials is the largest part of the pie at about 30% and hopes that "a steeper curve and acceleration in capital market activity helps this group."

But for industrials he sees a number of tailwinds, while lower gasoline prices, taxes, and rates could boost consumer discretionary stocks.

The strategist's key concern about earnings potential for 2026 seems to be in the form of a choppy growth expectation with Q1 expected to come in at 15.7% then falling to 6.3% growth in Q2, before turning back up to 10.8% by Q3.

"Much of the growth hinges on a very good Q4, which is typical, with earnings bouncing to ~25% for Small, 20% for Mid, and 18% for Large," he said.

(Sinéad Carew)

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