Small-Caps Could Find Second-Half Grooves | ETF Trends

The big equity market story in the first half of the year was the artificial intelligence-fueled resurgence by mega-cap growth stocks. With the second half here, market participants are examining “what’s next” opportunities. That search is intensifying amid speculation that many of the first half’s mega-cap leaders are now richly valued. One idea that’s increasingly mentioned as a potentially valid second-half opportunity is small-caps.

If that prognosis proves accurate, exchange traded funds such as the Invesco NASDAQ Future Gen 200 ETF (QQQS) could benefit.

As things stand today, QQQS was steady on a relative basis in the first half, outpacing traditional small-cap benchmarks. That could set the stage for an even better showing in the back half of 2023 as recession fears wane. This could possibly foster renewed interest in smaller equities.

QQQS Has Second-Half Allure

Past performance isn’t a guarantee of future returns. In other words, investors should ignore the first half and focus on what could propel QQQS going forward. The good news is that small-caps are gaining support on Wall Street.

“The Russell 2000 should rise by 14% during the next 12 months, according to a simple model based on US economic growth and starting valuations that has explained roughly two-thirds of Russell 2000 returns between 1995 and 2015,” according to a recent Goldman Sachs report.

While acknowledging that smaller stocks carry more risk, Goldman forecasts that the Russell 2000 will beat the large-cap S&P 500 through year-end. In good news, some of that risk is muted. Economists are dialing back recession expectations, which is relevant to economically sensitive small-cap equities.

Another point that could work in favor of QQQS in the second half is that while major gauges for small-caps, such as the Russell 2000, trailed the S&P 500 from January through June, some analysts argue that the “average” small-cap stock is on solid footing.

“While the index has dramatically underperformed the S&P 500, we have found the ‘average’ stock is doing just fine and is faring better than the average S&P 500 stock year to date,” according to a recent report by Roth MKM.

Additionally, some market observers view the broader small-cap universe as undervalued. Should more investors awaken to that theme, QQQS could benefit. It allocates over 36% of its weight to value stocks compared to about 21% with the growth designation.

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