Small-cap stocks have continued their trend of outperforming larger companies, a pattern observed throughout much of the current fiscal year. This performance is largely attributed to the perception of higher growth potential associated with smaller firms, particularly in a climate of sustained economic expansion.

Factors Driving Small-Cap Growth

Several factors contribute to the strength of small-cap stocks:

• Economic Growth: Smaller companies are often more sensitive to domestic economic conditions, benefiting directly from increased consumer spending and business investment.
• Investor Sentiment: A risk-on attitude among investors favors small-cap stocks, as they are perceived to offer higher potential returns, albeit with greater volatility.
• Tax Reform: Recent tax reforms are expected to disproportionately benefit smaller, domestically focused companies.

Potential Risks

While the outlook for small-cap stocks remains positive, investors should be aware of potential risks:

• Volatility: Small-cap stocks are inherently more volatile than their larger counterparts.
• Liquidity: Trading volume in small-cap stocks can be lower, making it more difficult to enter and exit positions.
• Interest Rate Hikes: Rising interest rates could negatively impact smaller companies that rely on borrowing for growth.

Despite these risks, the current market environment appears favorable for small-cap stocks, suggesting that their outperformance may continue in the near term. Investors should carefully consider their risk tolerance and investment objectives before allocating capital to this asset class.