Small Caps Struggle to Keep Pace as Investors Favor Stability of Large Cap Tech
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Small-cap stocks underperformed large caps for most of 2022, but their low valuations attracted investors late in the year. However, the rally has not continued in 2023.
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The market rally this year has been very narrow, concentrated in mega-cap tech stocks. Small caps were not invited to the party.
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Small caps are more sensitive to economic conditions than large caps. With high debt loads and many unprofitable firms, fundamentals don't favor a small cap rebound.
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Large cap tech giants now offer stability thanks to their size combined with strong growth, reducing the risk/reward appeal of small caps.
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Rather than buying small-cap ETFs, investors should pick individual small stocks carefully, looking for quality names trading at attractive valuations.