2020 was an incredibly challenging year for corporate earnings, as the COVID-19 pandemic took hold and resulting lockdowns led consumer spending to collapse and revenues to plummet for many companies across a range of industries and sectors. Smaller companies were hit particularly hard, compared to larger ones whose greater resources and more diverse revenue streams allowed them to weather the downturn more effectively. Value-oriented sectors were also more heavily impacted, as they tend to be cyclically sensitive sectors and more vulnerable to a marked decline in the economy.
As shown in the chart above, large-cap (Russell 1000) and small-cap stocks (Russell 2000) experienced substantial declines in earnings per share over the course of 2020. However, earnings are projected to rebound significantly in 2021 and even eclipse 2019 levels. Small-cap value stocks in particular are projected to see a massive increase in earnings this year in a sharp reversal from last year’s outsized drop.
As we note in our accompanying piece, in addition to the difference in expected earnings, small-cap value stocks have meaningfully underperformed large-cap stocks over the past few years. Notably though, that trend has begun to shift in recent months, with cyclical segments of the market outperforming. As COVID-19 vaccines become more widely distributed and the economy gradually reopens, small-cap value stocks should be well positioned to benefit from the broad pickup in activity.
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.