For much of this year, the narrative surrounding small-cap equities and ETFs has been the extent to which that segment is lagging large-caps. That scenario has compelled many market participants to eschew the risks with smaller stocks and embrace the relative safety of larger fare.
Over the past month, however, the Russell 2000 Index is higher by 6.82%. That potentially signals small-cap stocks could be in store for better things in 2024. The Invesco NASDAQ Future Gen 200 ETF (QQQS) could be among the ETFs meriting consideration ahead of the new year.
The ETF’s story is supported by more than the notion that small-cap stocks are overdue to rally and potentially generate strong showings in 2024.
Factors in Favor of 2024
Some of the case for QQQS in 2024 boils down to timing. Timing and market history aren’t promises of success. But it’s worth noting that the timing case for QQQS has multiple pillars of support.
“The biggest target drivers, according to historical performance, include Federal Reserve rate cuts, average return of second half of recession (post World War II), GDP below median, annual returns when there is above average and accelerating mergers and acquisitions; and fourth year of a presidential cycle,” reported Moncia Correa for Seeking Alpha.
There’s growing acknowledgement among professional market observers that small-caps could be primed to outperform in 2024. In its U.S. Equity Strategy report, published on Tuesday, Jefferies estimated that the Russell 2000 will jump 11% next year, with earnings per share growth of 6.9% — percentages that exceed the comparable forecasts for the large-cap S&P 500.
The bank also noted that small-caps are currently historically inexpensive relative to large-cap equities. As measured by price-to-sales, the S&P 500 trades at 7.7x, while the Russell 2000 trades at just 1.8x. That could highlight opportunity with QQQS, which allocates a third of its weight to value stocks.
At the sector level, healthcare is one of the groups favored by Jefferies in the small-cap universe. That’s meaningful to QQQS investors, because the Invesco ETF allocates more than 56% of its weight to that sector. Given the history of consolidation in the small-cap healthcare space, should mergers and acquisitions activity perk up next year, that could be another catalyst for QQQS.
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