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Chartwell Investment Partners

Potential catalysts for small-cap stocks

Tariff-driven volatility. Tax cuts. Deregulation.

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Potential catalysts for small-cap stocks

We expect volatility to continue as markets digest shifting policies on tariffs, taxes and deregulation. In this environment, we believe stock selection is likely to drive performance in small-cap stocks. Whether investors look at growth or value, we contend that it’s critical to focus on valuation and quality.

Tariff-driven volatility can (and has) created potential opportunities to invest in undervalued, higher-quality companies. Small-cap stocks on average are more domestically oriented, mitigating some effects of tariffs. In fact, tariffs may curb competition for small-cap companies with domestic production and customer bases. Tariffs are also likely to accelerate deglobalization and reshoring — both positives for small-cap companies.

Making the 2017 tax cuts permanent could deliver greater relative benefits to domestically focused small companies that otherwise cannot take advantage of international tax strategies employed by large multinationals. This could improve net income and strengthen earnings per share (EPS) growth.

We believe banks and financials will be the initial focus of the Trump administration’s deregulation agenda. Easing the reporting and reserve burdens on small- and mid-sized banks could help unlock M&A activity. Financials make up about 29% of the Russell 2000® Value Index and about 9% of the Russell 2000® Growth Index.

So far in 2025 small-cap stocks are trading at more than a 30% discount to their historic average relative to large caps. We believe this gap will close as small-cap earnings recover and forward estimates of small-cap EPS growth rise.

  • The Russell 2000 Value and Growth indices both peaked in November, then fell 27% and 29%, respectively, to their April lows.

  • Small-cap forward returns typically have been strong after drawdowns of at least 20%, with 1-year returns averaging 17% for small-cap value and 22% for small-cap growth (see chart).

  • This spring’s V-shaped recovery already has met that bogey, with the Russell 2000 Value up 17% and the Russell 2000 Growth up 23% in the six weeks following April 8. Given this, we would not be surprised if small caps churned sideways or even faltered a bit in coming months.

  • The 2-year and 3-year data below suggests gains from here could be significant, with 3-year returns after a 20% drawdown averaging 58% for small-cap value and 57% for small-cap growth.

 

 

Average forward returns after index's first 20% breach down
(since 1980 for large caps and since 1995 for small and mid caps)

Chart showing Average forward returns after index's first 20% breach down - since 1980 for large caps and since 1995 for small and mid caps

Source: Bloomberg, Raymond James Equity Research, as of 4/9/25.

Risk Information:

Investing involves risk, including risk of loss.

Diversification does not ensure a profit or guarantee against loss.

Disclosures

Index or benchmark performance presented in this document does not reflect the deduction of advisory fees, transaction charges, or other expenses, which would reduce performance. Indexes are unmanaged. It is not possible to invest directly in an index. Any investor who attempts to mimic the performance of an index would incur fees and expenses that would reduce return.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature, or other purpose in any jurisdiction, nor is it a commitment from Raymond James Investment Management or any of its affiliates to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical, and for illustration purposes only. This material does not contain sufficient information to support an investment decision, and you should not rely on it in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and make their own determinations together with their own professionals in those fields. Any forecasts, figures, opinions, or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions, and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements, and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

Many investors consider bonds to be “risk free” investment vehicles. Historically, bonds have indeed provided less volatility and less risk of loss of capital than has equity investing. However, there are many factors that may affect the risk and return profile of a fixed-income portfolio. The two most prominent factors are interest-rate movements and the creditworthiness of the bond issuer. Bonds issued by the U.S. government have significantly less risk of default than those issued by corporations and municipalities. However, the overall return on government bonds tends to be less than these other types of fixed-income securities. Investors should pay careful attention to the types of fixed-income securities that comprise their portfolio and remember that, as with all investments, there is the risk of the loss of capital.

The views and opinions expressed are not necessarily those of the broker/dealer or any affiliates. Nothing discussed or suggested should be construed as permission to supersede or circumvent any broker/dealer policies, procedures, rules, and guidelines.

Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The prices of small company stocks may be subject to more volatility than those of large company stocks.

Definitions

Bogey in finance refers to a benchmark level used compare the performance of an investment portfolio.

Deglobalization refers to trends and movements that tend toward a less connected world that is characterized by power-wielding nation states, local solutions, and border controls, as opposed to global institutions, treaties, and free movement of goods, capital, and people.

A drawdown is a decline in the returns of a security or group of securities, as measured over a period from the peak of returns to their trough.

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability.

Forward earnings per share is an estimate for the next period’s earnings per share for a company’s profit divided by the outstanding shares of its common stock.

Reshoring describes an effort to bring manufacturing and other services back to the United States from overseas operations.

Indices

The Russell 2000® Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 2000® Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2025. FTSE Russell is a trading name of certain of the LSE Group companies. Russell® is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor, or endorse the content of this communication.

The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The S&P MidCap 400® Growth measures constituents from the S&P MidCap 400 that are classified as growth stocks based on three factors: sales growth, the ratio of earnings change to price, and momentum.

The S&P MidCap 400® Value measures constituents from the S&P MidCap 400 that are classified as value stocks based on three factors: the ratios of book value, earnings and sales to price.

The S&P 500 Index measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 80% of the investable U.S. equity market.

The S&P 500 Growth Index measures growth stocks within the S&P 500 Index using three factors: sales growth, the ratio of earnings change to price, and momentum.

The S&P 500 Value Index measures value stocks within the S&P 500 Index using three factors: the ratios of book value, earnings, and sales to price.

The S&P SmallCap 600® Index seeks to measure the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

The S&P SmallCap 600® Growth Index measures growth stocks using three factors: sales growth, the ratio of earnings change to price, and momentum.

The S&P SmallCap 600® Value Index measures value stocks using three factors: the ratios of book value, earnings, and sales to price.

About Chartwell Investment Partners

Chartwell Investment Partners believes that actively managed strategies with high conviction and lower turnover will generate a consistent pattern of portfolio returns over the long term. Our portfolio managers take a long-term perspective with their investments, maintain focused portfolios, and strive for increased active share of their holdings to deliver attractive investment performance.

M-768632 Exp. 6/30/2026