Are Small-Caps Fading? Discover 6 Stocks That Can Keep Rallying!

Small market capitalization stocks have had a stellar ride this year, with the S&P 600 up a remarkable 16%. The index, which encompasses companies with an average market cap of around $3 billion, achieved a historic high of 1544 following the November elections, powered by investor enthusiasm for President-elect Donald Trump’s prospective fiscal policies. However, the good times won’t necessarily last for all small-cap stocks. The landscape is shifting, and it’s time to reevaluate which small-cap stocks are positioned for sustained growth.

A Moment of Reflection

Investors flocked to small-caps in anticipation of substantial fiscal spending aimed at stimulating the economy. This would be good news for the S&P 600, given its heavy weight in economically sensitive sectors like financials and consumer discretionary. Well-executed tax cuts for domestic production companies would particularly benefit earnings for this domestically-focused index compared to the globally exposed S&P 500. Yet, with this positive momentum reflected in the S&P 600’s price hovering below 1510, we must consider whether small-caps can keep up the pace.

Investor Sentiment and Outflows

As of now, we’ve seen about $30 billion flood into U.S. small-cap funds, marking a record high and a tripling of last year’s inflow. But it’s crucial to recognize historical trends: every year following a record inflow typically sees a net outflow from small caps. According to Dennis DeBusschere of 22V Research, we currently lack the spark needed to fuel another rally in small caps going into year-end. This sets the index in a precarious position where companies must prove they can deliver earnings above current analyst models.

Cautious Valuations

The S&P 600 trades at roughly 17 times the expected 2025 earnings, which is a noticeable increase from just above 14 times at the start of the year. While this remains cheaper than the S&P 500’s over 22 times, the narrowing gap raises concerns. Disappointment on earnings now poses a real risk for smaller firms, setting the stage for a potential correction. To put it plainly, for small-caps, it’s a classic “show me” story.

Six Steady Performers to Watch

To identify resilient stocks, Barron’s conducted a thorough screen of the S&P 600, focusing on companies that have consistently surpassed analyst earnings estimates in at least seven of the previous eight quarters. We looked for firms capable of sustaining profit growth of at least 10% in both 2025 and 2026, while limiting ourselves to those trading at attractive valuations below the index’s current price-to-earnings ratio. Here’s what we found: 23 stocks made the cut, but let’s dig into some of the top picks.

1. Enova International (Market Cap: $2.7 Billion)

This online lending powerhouse has proven its mettle and could continue to shine with solid earnings growth ahead.

2. Allegiant Travel (Market Cap: $1.5 Billion)

Though smaller, Allegiant is swaying travelers with competitive pricing and unique offerings, primed for future growth.

3. LiveRamp Holdings (Market Cap: $2.1 Billion)

This software-as-a-service company continues to innovate and catch the eyes of investors looking for data-driven solutions.

4. Mr. Cooper Group (Market Cap: $6.2 Billion)

The mortgage servicer shows promising prospects for growth amid a challenging housing market.

5. Steven Madden (Market Cap: $3.2 Billion)

This fashion brand-owner trades at 15.3 times earnings, outperforming expectations in seven of the past eight quarters. With management projecting mid-teens growth in international sales, they’re carving out a notable presence, particularly in Europe. Analysts expect sales growth to reach $2.49 billion by 2026, showcasing potential for robust EPS growth.

6. Tripadvisor (Market Cap: $2 Billion)

Although it faces heavy competition from travel giants, Tripadvisor has consistently seen sales growth year-on-year. Trading at 10.8 times earnings, its foray into artificial intelligence to enhance user experience lays groundwork for continued success. Expected revenue growth is forecasted at nearly 7% annually, providing a strong case for future profits.

Final Thoughts

In summary, while small-caps show signs of fading in this overbought environment, there are encouraging picks that can defy the norm and continue to rally. Keep a close watch on these stocks and prepare to act when the time is right! Timing is key, so remain vigilant, and happy trading!