By Jonas Edholm Portfolio Manager
Bargain prices and an improving economic environment look favourable for smaller companies to generate bigger returns.
With the stock market whales remaining dominant (and several becoming even bigger), 2024 has been tough for the minnows. The global small cap index trailed the large cap equivalent by around eight percentage points at the end of August as investors have continued to shun smaller companies in favour of tech giants linked to Artificial Intelligence[1].
These ‘Magnificent 7’ make up 30% of the US S&P 500 index, while in Europe, ten stocks (aka ‘the GRANOLAS’) represent a quarter of the overall market[2]. The narrowing of returns has also distorted valuations to the extent that global large caps now trade at a record 12% premium to smaller ones on a P/E basis, compared to an average 12% discount over the last two decades. The ‘magnificent gap’ between the largest US technology companies and global small caps is even wider and approaching a 50% premium.