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Small caps have been one of the hottest corners of the markets in the wake of President-elect Donald Trump’s election victory four weeks ago. But now there are signs of trouble in paradise, potentially capping future gains. “The concern with small- and mid-cap stocks right now is that while there is a change in sentiment because of Trump, earnings growth is still not good and we’re seeing downward [earnings] revisions for next year,” Andrew Krei, co-chief investment officer at Crescent Grove Advisors, told CNBC. “Small caps right now are a trade, not a fundamental move,” Krei added. The Russell 2000 jumped nearly 11% in November, pushing its year-to-date gain to 20.1% but still lagging the S & P 500 ‘s 26.5% rise. Lauren Goodwin, New York Life Investments economist and chief market strategist, is also fading her exposure to small cap stocks, often defined as companies valued at between $250 million and $2 billion . While she is more optimistic on the sector’s growth prospects as well as tailwinds from a stronger U.S. dollar, which can hurt the profits of more internationally-oriented companies, Goodwin nonetheless is skeptical. “We’re not at the beginning of a new cycle; strong outperformance isn’t likely,” she recently wrote in a research note. .RUT .SPX YTD mountain Russell 2000 and S & P 500 in 2024 Other areas of opportunity Krei is instead looking toward at the broader market, excluding the mega cap technology stocks. The problem with big tech names in coming quarters isnthat they’re more at risk due to inflated expectations, he said. Rather, some other Trump trades that have more room to run include value sectors, such as industrials and energy, Krei believes. While “the impact of [pending] Trump tariffs on industrials is unclear,” Krei said. “the valuation starting point is more favorable and there is more margin for error in the sector.” Krei is also more optimistic on financials, another group that, like small caps, has outperformed following Trump’s election. “The financials sector is like the counterpoint to tech,” said Krei. One way investors can play these trades is through sector-based ETFs. The Financial Select Sector SPDR Fund ETF (XLF) surged 10.5% in November, bringing its 2024 advance to 38% in 2024. The Energy Select Sector ETF (XLE) has risen 16.7% year to date, underperforming the broader market, but jumped 7.8% in November alone. The Industrial Select Sector SPDR ETF (XLI) added 7.6% in November and has climbed 27.6% year to date, a little more than one percentage ahead of the broad market. —CNBC’s Michael Bloom contributed to this report.
