LIVE MARKETS-Small will beat large in 2025, says Jefferies

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SMALL WILL BEAT LARGE IN 2025, SAYS JEFFERIES

The large-cap Russell 1000 index .RUI advanced nearly 23% last year. However, with a gain of only around 10%, the small-cap Russell 2000 index .RUT failed to keep pace.

According to Steven DeSanctis, equity strategist at Jefferies, not only did the RUT suffer its worst December since 2018, with a more than 8% swoon, it lagged large last year by the fourth widest margin ever in the history of Russell benchmarks.

Additionally, after a very tough December, he says that 2024's underperformance by small caps vs large caps extends the streak to eight years, which is the longest in the size segment's history.

That said, Jefferies looks for small to finally beat large in 2025.

"The key to success will be better earnings growth. Active rebounded in December, but had poor '24 up\down cap, as valuations did not matter and momentum was name of game. It has since weakened, and we look for more of same come Q1," writes DeSanctis in a note.

Moving to 2025, DeSanctis expects that small-cap earnings growth will surpass that of large by the Q2 reporting season, with earnings growth peaking in Q4 at 26% vs 16.4% for large caps.

He notes that better earnings growth in the second half has always been the case since Jefferies started looking at SMID caps back in the late 90's.

In any event, for the full year of 2025, DeSanctis thinks small-cap earnings growth should exceed that of the large caps.

"We think the rebound is feasible, thanks to easy comps by some of the largest sectors based on profit weight, a still strong economy, and the potential for lower borrowing costs," DeSanctis writes.

Of course the year is young, but so far in the first trading day of 2025, the indexes were conforming with the thesis with the RUT up 1.1% vs the RUI's 0.4% advance.

(Terence Gabriel)

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