This week, the Russell 2000 is considering the possibility of exceeding 2021 highs and, therefore, trading at new all-time highs. But even if this does not happen in the short term, Wall Street’s small cap index has another joy in store for investors in 2025. The market hopes that next year an increase in profits that could not happen will crystallize. in the current year. He Russell 2000 earnings per share will exceed $90 per share that will imply exceeding what is expected for 2024 by 66.9%.
The market consensus that reflects Bloomberg expects the Russell 2000 to close next year with earnings per share of $91.5 per share. Not only would it mean seeing the biggest year-over-year jump 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 of more than $10 billion.
Until March of this year, everyone thought about a rapid easing of monetary policy in the United States. But these dreams were cut short. The reality has been that the United States Federal Reserve only lowered rates by 75 basis points in 2024, since it is ruled out that it will make new downward adjustments this year, according to Bloomberg. In this way, the possibility of witnessing a more favorable economic environment with falling financing costs and greater American consumer demand: factors that tend to benefit small and medium-sized businesses that are generally more exposed to national economies.
As an example, at its peak in March of this year, the expert consensus was considering an earnings per share for the whole of 2024 of more than $80 per share. Today, these expectations have been seen cut to $54.8 per share within the Russell 2000. But the more favorable environment expected for this year now moves to 2025.
With the arrival of Donald Trump to the White House, American companies will encounter a trade war on a global scale, but they will also discount a few years of lower tax burden for small and medium-sized businesses of the country. “Immediately after the election there was a rebound in the sectors favored by the Republican program, and small and medium-sized businesses recorded their largest weekly increase in 24 years, with the Russell 2000 rising 8.6%, anticipating a large impact of tax cuts,” commented Nicolas Bickel, head of investment at Edmond de Rothschild.
It is true that expectations of interest rate cuts in the United States have been reduced since Trump won the elections, but it is assumed that the Fed will continue to adjust its reference next year and leave a more favorable environment for the smallest of Wall. Street. “The lower interest rates “It benefits medium-sized companies more than the technology giants, which have abundant liquidity,” summarized the investment director of Cazenove Capital, Caspar Rock.
To date, the S&P 500 has been the index that beat all market expectations in both revenue and net profit. Even more so when compared to the Russell 2000, which only recorded a year-on-year increase in the second quarter (profits in the third quarter of 2024 disappointed, on average, 4.5% compared to what was expected by the consensus reported by Bloomberg ). “Small caps are on track to overcome the revenue hurdles that existed this season and the Russell 2000 is testing its high on the stock market before December,” commented the head of equity strategy at Bloomberg IntelligenceGina Martin.
He Russell 2000 advances almost 20% in the year. And, despite the steep rise so far in November, the S&P 500 remains in the lead thanks to the momentum of the large caps on the Wall Street stock market. All in all, the small and mid-cap index is trading at a premium to its own historical average but also to the S&P 500.
The Russell 2000 has a PER (times that net profit is reflected in the trading price) of more than 37 times. The average of the index so far this century is 27 times, once the distorting effect of the 2009 financial year is eliminated and during the crisis of the dotcomwhere this multiplier was at values greater than 100 times. The premium would thus approach 40%.
For its part, the S&P 500 is trading with a profit multiplier 35% higher than its average PER of the last 24 years, at 18.6 times, which leaves the Russell 2000 expensive in the current context and in relation to the average of both indices so far this millennium. With the increase in profits expected by 2025, the selector of small and medium-sized companies on Wall Street will moderate this multiplier to 24.8 timesaccording to Bloomberg. The consensus of experts considers against it that the Russell 2000 offers more distance ahead on the stock market. Analysis firms set their average target price at 2,805 points, which implies a potential of more than 15%.
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