Leading into 2025, some advisors and plenty of retail investors were likely tired of hearing about purported small-cap rallies that were either short in duration or didn’t materialize at all.
With the help of falling interest rates, smaller stocks started getting their acts in gear last year. Over the past 12 months, the Russell 2000 and S&P SmallCap 600 indexes are up 41.2% and 35.6%, respectively, while the S&P 500 is higher by 26.5%. To be sure, those are impressive advantages for the smaller stock benchmarks.
Those leads could prove durable and extend as more investors remember that small-caps can be pivotal pieces of diversified portfolios. More assistance from the Federal Reserve and firming of the U.S. economy would also support the case for smaller stock exposure. Count those as among the macroeconomic themes that could benefit this asset class.
For those that want to be more tactical with small-caps, the aerospace industry is one to watch. Hailing from the industrial sector, aerospace is commonly attached to defense, which has been a boon, particularly for large-caps, but there are other potential benefits for smaller aerospace stocks.
Backlogs Could Boost Select Small-Caps
Airlines are currently operating old fleets, the result of backlogs manufacturers are finally working through in material fashion.
“Original equipment manufacturers (OEMs) such as Airbus and Boeing are ramping up production to meet increased demand,” notes American Century. “After years of supply chain headaches, deliveries of new aircraft were expected to rise by 25% last year. To handle this higher demand, the OEMs need help from an army of suppliers — many of which are smaller firms with specialized expertise. These companies produce critical parts and components that are hard to find elsewhere.”
Good news for small-cap investors: many aircraft parts suppliers are small-cap companies and that’s reflected in the Russell 2000 and S&P SmallCap 600 indexes. The former allocates 18.60% of its weight to industrial stocks, making that the index’s largest sector exposure, while the S&P gauge devotes 17.75% of its weight to this sector. For clients and investors that’s potentially good news because…
“…Aerospace manufacturing requires precise accuracy because lives can literally depend on these products. We believe that small-cap companies that meet these high standards are likely well-positioned to benefit from increased demand,” adds American Century.
Space Angle Helps, Too
As advisors already know, news of the upcoming SpaceX initial public offering (IPO) is putting a lot of eyeballs on the space investment theme. Small-cap industrial stocks with established ties to the aerospace industry shouldn’t be lost in that shuffle because some stand to benefit from the expansion of the space economy.
“The space industry could grow by 9% annually through 2035, reaching a $1.8 trillion market,” according to American Century. “That’s based on a forecast from the World Economic Forum and McKinsey & Co. To put that into perspective: Nearly 15,000 satellites currently orbit Earth, and Goldman Sachs Research estimates another 70,000 could be launched into low orbit in the next five years.”
Bottom line: if small-cap bullishness extends, don’t be surprised it’s established industrial companies with aerospace inroads displaying leadership.
Related: Hype vs. Reality: How to Spot Crypto Press Releases Designed to Mislead