Investing.com — A Trump victory could prompt hedge fund investors to turn to small-cap stocks, which recently trailed Trump’s chances in October, RBC Capital Markets said in a report.
This move has historical precedent, as small-cap positioning surged in 2016, 2017, and 2018 amid optimism after Trump’s victory, corporate tax cuts favoring small businesses, and the trade war. between the United States and China.
Small-cap futures climbed Tuesday evening as election results came in, with the index gaining 5.8% on Wednesday.
RBC strategists noted that one of the biggest questions from investors Wednesday was how much room small caps still have to climb.
They suggested that positioning and sentiment may already be somewhat strained, with the close to highs reached in 2016, 2017 and 2018, according to the latest CFTC data.
Strategists recommended watching the Russell 2000’s median price-to-earnings (P/E) ratio, which stood at 16.7 times on Tuesday, compared to previous peaks of 18.9 times in 2016, 19.7 times in 2017 and 17.6 times in 2018. This suggests limited potential for further gains.
“There is not much room left, but probably some even after Wednesday’s big move,” the strategists write.
In retrospect, RBC observed that small caps outperformed large caps during a period following Trump’s victory in 2016 and Biden’s victory in 2020, although both recoveries were relatively brief.
The 2016 outperformance peaked about a month after the election, followed by two shorter rallies in 2017 and 2018. In contrast, the 2020 rally lasted about four months.
Interestingly, both periods of small-cap strength were accompanied by rising 10-year Treasury yields.
Mr. Trump is expected to return to the White House for another four-year term, alongside Ohio Senator JD (NASDAQ:) Vance, whom he has chosen to serve as vice president.
According to NBC News, Republicans are expected to regain majority control of the U.S. Senate in 2025, with at least 51 seats assured in the 100-member chamber by January, when the new Congress is sworn in.
