Jefferies predicts Nvidia and tech giants will outperform the entire Russell 2000, with small-cap gains through 2025
Nvidia (NVDA, Financials), Apple (AAPL, Financials) and Microsoft (MSFT, Financials) are each now valued at more than $3 trillion, a market dominance that makes the top five companies in the S&P 500 The combined market capitalization is nearly 4.4 times.
Analysts at Jefferies expect a strong recovery in small-cap stocks despite the concentration of value among large companies, with the Russell 2000 index expected to rise 13.5% to 2,715 by the end of 2025.
The forecast points to a possible turning point for small-cap stocks, which have lagged large-cap stocks for eight straight years. Jefferies expects the Russell 2000 to grow 13% by 2025, slightly below the current forecast of 16% but still ahead of forecasts for large-cap growth. The survey also found that the prices of small-cap stocks have increased; the future price-to-earnings ratio has now fallen to the 95th percentile in history. Analysts say these higher values will result in less strong near-term absolute performance.
Jefferies noted that while small-cap stocks remain very cheap relative to large-cap stocks, the difference in price-to-sales ratios underscores the stark difference. The top five companies in the S&P 500 have a median price-to-sales ratio of 9.4x, well above the Russell 2000’s average price-to-sales ratio of 2x. Despite this disparity, Jeffries stressed that factors such as improving balance sheets, less pressure from new government regulations and a strong M&A environment could help small-cap momentum next year.
The study also highlights market concentration in the Russell 2000 Index, with the top 10 constituents currently accounting for 33.3% of the index’s overall weighting, an all-time high. This dynamic and higher valuations may limit the upside potential of small-cap stocks. A return to the Russell 2000 index would be a clear turnaround from years of underperformance and is consistent with Jefferies’ prediction of a more favorable environment for small-cap growth.
This article was first published on GuruFocus.
