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While a handful of large-cap stocks drove much of the market’s rebound last year, small-cap stocks are leading the way in 2021.

Small cap stocks have begun to outperform chartOver the past few years, small caps and value-oriented stocks have lagged behind larger and growth-oriented companies by a considerable margin. As illustrated in the chart above, that trend showed signs of shifting since late May 2020, as U.S. small caps began to make up some of their lost ground. The question for investors is, will this reversal in market leadership last?

Historically, small-cap and value-oriented stocks have performed extremely well coming out of bear markets. While many questions remain about the path forward for the U.S. economy, most forecasters anticipate that near-term weakness will transition into strong growth as the year progresses. This process should be fueled in part by the gradual lifting of shelter-in-place orders and other restrictions that curtailed economic activity in recent months. Small-cap stocks, many of which are more cyclically sensitive, should be well positioned to rebound as the economy recovers.

Changes in market leadership often accompany turning points in the cycle, which tend to bode well for small caps. As illustrated above, when stocks have reached similar turning points in the past (such as in 1992 or 2000), an extended period of outperformance for small-cap and value-oriented stocks has generally followed. In addition to their cyclical advantages, small-cap value stocks appear quite attractive from both a valuation and earnings growth standpoint (see accompanying piece).

The bottom line? We believe that small-cap stocks, particularly in value-oriented sectors, are well positioned to perform well over a multiyear time horizon.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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