Small-cap stocks will reward investors with 12 percent growth next year as companies see profit growth from the tax reform that is expected to come with Republican Donald Trump’s presidency, according to Barclays Capital.
“The game-changing election result is a tailwind for small caps,” Venu Krishna, an investment strategist at Barclays Capital, said in a Nov. 21 note obtained by Newsmax Finance. “Small caps are likely to benefit significantly from lower corporate taxes especially given their higher effective tax rates compared to large caps.”
The investment bank set a year-end target of 1,440 for the Russell 2000, a broad benchmark of companies with a median market value of about $530 million. The index traded at about 1,320 on Nov. 21.
“For small caps with positive earnings, a drop in the effective corporate tax rate to 15 percent, which is consistent with the proposal by Mr. Trump, suggests a potential boost to earnings of about 13 percent,” Krishna said. “Similarly, a reduction in personal taxes is likely to spur consumption thereby aiding the domestic economy.”
Financial and energy stocks will benefit from reduced regulatory burdens, while a U.S. economic expansion of 2.2 percent will support top-line growth, he says.
“The case for small caps over large caps is built around our view on their better relative valuations, greater exposure to the domestic economic improvements and disproportionate benefits from policy actions,” Krishna says. “From a sector standpoint, we are overweight financials and discretionary and underweight utilities and technology.”
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