Small-Cap Earnings Revisions—Royce
article , video 09-03-2019

Small-Cap Earnings Outlook

CO-CIO Francis Gannon explains why earnings for many small-caps have been better than anticipated.


How have small-caps earnings done so far this year?

Earnings revisions for small-caps have been better than I think many people anticipated and the surprise will actually be that things are a little bit better in the latter half of the year and earnings are stronger in the second half of the year, especially within some of the economically sensitive and cyclical small-cap businesses.

Clearly, the environment we live in is very pessimistic around earnings, it’s very nervous about the economic environment we live in. But we’re hearing from a day to day perspective from many of these businesses that their underlying prospects are quite good.

Where do you think this pessimism stems from?

Part of the pessimism around the market in general this year is given the fact that the market has done quite well on a year-to-date basis, large-caps have done better than small-caps, and people are nervous about the fact that here we are 11 years after our last recession. When is the next recession going to be coming?

And when you look at the world from a bottoms up perspective, and not a top down perspective, what you find is the underlying, I think, structural economy is actually better than people give it credit for. I think one of the more important things to think about when it comes to earnings is that we are in a moderate growth, low inflationary environment, which is actually a very positive backdrop for equities.

Where are you finding opportunities?

From a valuations perspective, the market has I think uniquely this year gone from overvaluing certain areas of the market that are considered to be more defensive in nature, while creating great valuation opportunities in those areas of the market that are more cyclical in general. And so we find ourselves at a moment in time where the cyclical businesses, those industrial businesses, et cetera are actually cheaper than where they were at the market low during the Great Recession, which makes no sense, given where we are from an economic perspective today and from an opportunity perspective for many of these businesses.

So the valuation discrepancy we’re finding is the defensive area of the market is quite expensive and the more cyclical areas of the market are actually quite cheap.

More Small-Cap Perspectives


Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of July 10, 2019 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

Cyclical and Defensive are defined as follows: Cyclical: Communication Services, Consumer Discretionary, Energy, Financials, Industrials, Information Technology, and Materials. Defensive: Consumer Staples, Health Care, Real Estate, Utilities.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)



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