Small-Caps Are Fading: 6 Stocks That Can Keep Rallying

As savvy traders, it’s time to face the reality that not all small-cap stocks can continue their sensational runs in the current market environment. The S&P 600, which encompasses an average market capitalization of $3 billion, has indeed surged a whopping 16% this year. However, it was the result of a long-awaited catch-up rally following the record-breaking close at 1544, which came on the heels of the November election. As we know, the narrative shifted post-election, with investors jumping on small-caps in anticipation of President-elect Donald Trump’s fiscal proposals. The expectation of significant government spending aimed at spurring economic growth was indeed a flame that ignited a small-cap bonanza.

A Glimpse Into the Trends

With the small-cap index experiencing such a robust beginning to 2023, it’s crucial to evaluate the sustainability of these gains. Tax cuts for domestic production industries seemed to hold promise—as small-cap firms tend to be less globally exposed compared to their larger counterparts within the S&P 500. Yet, as we inch forward, the S&P 600 appears to have plateaued just under the milestone price level of 1510. It’s crucial to note that the index has not hit new highs in weeks, indicating that buyers may have exhausted their appetite.

In stark contrast to previous years, we find that a record $30 billion has flowed into U.S. small-cap funds this year, which is triple last year’s inflow according to Bank of America. But historically, record inflows have often been followed by substantial outflows the year thereafter. The stage seems set for a waning interest unless small caps can showcase genuine earnings growth potential. Last year’s exuberance has firmly transitioned to a ‘show me’ employment story in the eyes of analysts.

The Show Me Situation

According to Dennis DeBusschere of 22V Research, there is a pressing need for small caps to demonstrate higher-than-expected earnings potential—after all, the S&P 600 is currently trading at about 17 times estimated 2025 earnings. This is cheaper than the S&P 500’s over 22 times but the gap has narrowed significantly. Any revenue or earnings disappointments could lead to major declines for these lesser-cap stocks.

Six Small-Caps Worth Watching

Not all small-caps are created equal. Here are six stocks within the S&P 600 that showcase resilient growth potential and are well-positioned to continue their rallies. We explored firms that have consistently beaten analyst earnings estimates over the past two years and that exhibit strong growth projections.

• Enova International – This $2.7 billion online lender has consistently outperformed expectations, and with its agile operating model, stands to benefit from upcoming fiscal policies.
• Allegiant Travel – With a market cap of $1.5 billion, Allegiant is capitalizing on post-pandemic travel recovery, making it another strong candidate.
• LiveRamp Holdings – This $2.1 billion SaaS company is seeing significant traction in the market, scoring well on steady earnings growth.
• Mr. Cooper Group – Trading at a market cap of $6.2 billion in the mortgage servicing sector, Mr. Cooper has maintained strong fundamentals amidst changing interest rate patterns.
• Steven Madden – With a $3.2 billion market cap and a P/E ratio of 15.3, this fashion brand owner has outshone expectations consistently while ramping up business in Europe. Analysts project it can grow total sales to $2.49 billion by 2026.
• Tripadvisor – With a market cap of $2 billion and trading at 10.8 times earnings, this company has seen annual sales growth since 2020. Their recent upgrades, including the integration of AI into their platform, signify it’s on the precipice of further growth, with analysts projecting nearly a 7% increase in revenue by 2026.

Conclusion: Stay Astute and Informed

The small-cap space is becoming crowded, and not all players will thrive in a potential downturn. For those navigating this terrain, focus on stocks that have consistently excelled—those that have passed the earning test multiple times in hard-hitting environments. Look after your portfolio smartly; not every small-cap story will end in rallying confidence. Keep an eye on the fundamentals, earnings potential, and sector trends—these will be vital in determining winning positions as we advance into 2026 and beyond.

Stay tuned, traders—your next big opportunity could be around the corner!