Small-cap rally has not run out of steam

US equities

For the first time in five years the outperformance by small caps of larger stocks is perceived to be under threat from rising interest rates. Several advantages to smaller companies remain, however, suggesting potential still exists

US small-cap stocks have outperformed their larger counterparts for the best part of the last five years. Some of the reasons for this relate to their relative valuations, sector mix and the economic sensitivities of smaller companies. The current perception is that the valuation gap has been closed and these indices are vulnerable to a rising interest rate environment. However, we argue that there is potential for this sector to continue to outperform, albeit perhaps to a lesser extent, at least in the short term. The chart shows how the S&P 600 Small Cap index has outperformed the S&P 50...