Bank Failures: It’s Getting Warmer… What To Do?

Would you ever limit your grocery store shopping to just one aisle? Regrettably, a lot of investors do this when it comes to their portfolios—by, for instance, only including recognizable huge companies or sticking to markets in their home countries. Future earnings could be lost if you don't widen your horizons or change with the flow, especially in a dynamic economic environment like this one.?

For three main reasons, I think smaller and medium-sized businesses have a golden chance right now:

1. Small- and mid-cap equities have performed better than large-cap firms over the past 25 years, which may come as a surprise to some.

Recency bias is a cognitive bias whereby we anticipate that the past will repeat itself. For the past ten years, big tech has fueled returns on large-cap stocks, generating a staggering 160% price return. Nonetheless, a review of the last 25 years' returns reveals that smaller businesses have outperformed and increased more than larger ones.?

All of which is to imply that recent large-cap outperformance may be the exception rather than the rule.

2. It's so awful that it's good. We believe that valuations and earnings estimates have peaked, signaling an entry point.

Estimates for corporate profits have decreased by more than 10% over the past year across all market capitalization ranges, but small-cap shares have seen the worst drops, and the pain has been so severe that we are already beginning to see a rebound. Also, valuations for small and mid-cap enterprises have corrected to levels we often see during recessions (while large-cap valuations are still in line with their long-term averages).

3. The leaders of the upcoming cycle are not likely to be the same as those of the last one, and SMID-cap businesses may grab the reins.

Technology dominated the last economic cycle, helped along by historically low borrowing rates. Future mega-cap tech companies' growth rates are difficult to predict, particularly when important sectors get more deeply penetrated and values continue to seem overinflated. However, SMID-cap companies appear to be well-positioned to gain from increased activity in the capital markets, a new era of capex spending focused on the real economy (due to a greater weighting toward sectors like industrials, materials, and real estate), and the ongoing effort to strengthen supply chains in the face of geopolitical tensions (as companies seek to onshore their production).

Investment considerations

The most significant long-term contributors to capital growth for investors, in my opinion, are large-cap equities. Yet, the market is currently more diverse than only the largest corporations. Small- and mid-cap companies typically outperform as growth picks up as cycles shift, so we believe this is the perfect time to start investing in them.

SMID-cap stocks are more likely to be volatile and to have higher debt levels, thus this segment of the market is not without its risks. In this market, it's wise to work with active managers who have a track record of picking out high-caliber companies with clean balance sheets and the highest potential for future trends.