Stifel says buy small-cap stocks into year-end due to the improving business environment

  • Stifel is optimistic about smaller companies because of their strong financial performance and the benefits they got from tax reform.
  • The firm notes the Russell 2000 earnings on average rose 34.8 percent in the second quarter and sales rose 10.5 percent.
  • "We remain constructive on U.S. small cap equities looking forward," global head of investment strategy Michael O’Keeffe says in a note to clients.
Brendan McDermid | Reuters

Small-cap stocks' big run this year will keep going into year-end, according to Stifel.

The firm is optimistic about smaller companies because of their strong financial performance and the benefits they got from tax reform.

President Donald Trump signed the Republican tax overhaul in December, permanently lowering the corporate tax rate to 21 percent from 35 percent.

"As we move into the second half of the year, the market environment is positioned well for U.S. small cap equities to remain one of the preferred markets," global head of investment strategy Michael O'Keeffe said in a note to clients Friday. "Small business owners continue to anticipate greater sales and even better business conditions for the remainder of the year. We expect this to result in increased investment spending that ultimately leads to GDP growth."

The Russell 2000, the benchmark index for small-cap stocks, is up 12.4 percent this year through Friday versus the S&P 500's 7.5 percent gain.

O'Keeffe noted the Russell 2000 earnings on average rose 34.8 percent in the second quarter and sales rose 10.5 percent.

The strategist said small companies have less exposure to international markets than companies in the S&P 500 in the event the global trade environment deteriorates.

"Small cap equities provide an opportunity for investors to invest in companies that generate a large portion of their revenue inside the U.S., potentially insulating them from geopolitical developments," he said. "We remain constructive on U.S. small cap equities looking forward."