Small-cap growth funds are outperforming the broad market as the economic recovery spurs investor confidence. Like previous rebounds, the current recovery is generating disproportionately higher earnings ratios for small-cap growth stocks. With lower revenue bases than large companies, small companies generally outperform in recoveries as higher sales have a bigger impact on revenues and earnings.
Small-cap growth stocks have also gained this year as investors move into more volatile, higher-beta areas of the market. With the rising economy boosting market sentiment, investors have increasingly shifted from defensive positions to more growth-oriented areas.
Unlike small-cap growth stocks’ outsized returns of the 1990s, Standard & Poor’s feels this year’s market returns are generally sustainable. “We don’t see the market getting out of hand–investors have learned not to get overextended,” says Sam Stovall, Standard & Poor’s chief investment strategist.