This week, the Russell 2000 is eyeing the possibility of surpassing 2021 highs and, as a result, trading at new all-time highs. But even if that doesn’t happen in the near term, Wall Street’s small-cap index has another joy in store for investors in 2025. The market is hoping that next year, a surge in earnings that might not have been possible produced will crystallize during the current year. He Russell 2000 earnings per share to exceed $90 per share, which will involve exceeding what is expected for 2024 by 66.9%.
The market consensus which reflects Bloomberg expects the Russell 2000 to close next year with earnings per share of $91.5 per share. Not only would this mean the largest year-over-year increase since 2009, but it would also mean would mean recording the highest value since 2006before the Lehman Brothers crisis affected the income statements of companies like those in this index, which at current prices does not include any company with a market capitalization greater than $10 billion.
Until March this year, everyone was thinking about a rapid easing of monetary policy in the United States. But those dreams were cut short. The reality is that the US Federal Reserve has only lowered its rates by 75 basis points in 2024, since it is ruled out that it will make further downward adjustments this year, according to Bloomberg. In this way, the possibility of witnessing a more favorable economic environment with lower financing costs and greater American consumer demand: factors that tend to benefit small and medium-sized businesses, generally more exposed to national economies.
As an example, at its peak in March of this year, the expert consensus envisioned full 2024 earnings per share in excess of $80 per share. Today, these expectations have come true reduced to $54.8 per share in the Russell 2000. But the more favorable environment expected for this year now extends to 2025.
With the arrival of Donald Trump in the White House, American companies will face a global trade war, but they will also ignore a few years of tax relief for small and medium-sized businesses of the country. “Immediately after the election, there was a rebound in sectors favored by the Republican agenda, and small and medium-sized businesses saw their largest weekly increase in 24 years, with the Russell 2000 up 8.6%, “anticipating a significant impact of tax cuts,” commented Nicolas Bickel, head of investments at Edmond de Rothschild.
It is true that expectations for interest rate cuts in the United States have diminished since Trump won the election, but it is assumed that the Fed will continue to adjust its benchmark next year and leave a more favorable environment for the smallest on Wall Street. . “THE lower interest rates “This benefits mid-sized companies more than technology giants, which have abundant liquidity,” summarized Cazenove Capital investment director Caspar Rock.
To date, the S&P 500 is the index that has exceeded all market expectations, both in terms of revenue and net income. Especially when compared with the Russell 2000, which only recorded an increase over one year in the second quarter (profits for the third quarter of 2024 disappointed, on average, 4.5% compared to this expected by the consensus reported by Bloomberg). ). “Small caps are on track to overcome the income hurdles that existed this season and the Russell 2000 tests its maximum on the stock market before December”, commented the head of equity strategy at Bloomberg IntelligenceGina Martin.
He Russell 2000 advances by almost 20% over the year. And despite the sharp rise recorded so far in November, the S&P 500 remains in the lead thanks to the dynamism of large caps on the Wall Street Stock Exchange. Overall, the small and mid-cap index trades at a premium to its own historical average but also to the S&P 500.
The Russell 2000 has a P/E (times net income reflected in trading price) of more than 37 times. The average of the index so far this century is 27 times, after removing the distorting effect of FY 2009 and during the period crisis of dotcomwhere this multiplier was at values greater than 100 times. The premium would thus approach 40%.
For its part, the S&P 500 trades with a profit multiplier 35% higher than its average PER over the last 24 years, at 18.6 times, which leaves the Russell 2000 expensive in the current context and compared to the average of the two indices so far this millennium. With profits expected to rise by 2025, Wall Street’s picker of small and mid-sized companies will moderate this multiplier to 24.8 timesaccording to Bloomberg. The consensus of experts, however, believes that the Russell 2000 offers more distance ahead on the stock market. Analysis firms set their average price target at 2,805 points, which implies a potential of more than 15%.
