SMALL CAPS CAN BE A HEDGE AGAINST AI MANIA
Small cap stocks are a possible hedge against the optimism over artificial intelligence that has underpinned recent market performance, Talley Leger, chief market strategist at The Wealth Consulting Group, told Reuters in an interview.
Unlike in recent times, small cap stocks are trading at a large discount compared to their larger cap counterparts, putting them in position for significant gains in the near term, Leger says.
The S&P 600 small cap index (.SPCY) is down 0.4% this year compared with the S&P 500 
SPX, which is up 13.5% in the same period.
“The space has been underperforming for a good 14 years so the valuations are exceptionally attractive,” Leger says. “But that’s not enough,” he adds.
The earnings of small cap companies are expected to grow faster next year as interest rates are in a downward trend while strong growth in large cap earnings is also expected to normalize, Leger says.
The “risk premium” in small caps is also healthy while market volatility and investor fear have declined.
“The smaller cohort of the equity market isn’t known for its stability and consistency of earnings but the low base effects are very powerful coming off a bottom,” Leger says. “So it can produce extremely rapid growth rates.”