Small Caps Poised for Gains

According to Investing.com, small caps are lagging behind the broader market in October but are expected to continue gaining due to U.S. economic growth and reduced election risks, per Wells Fargo's Thursday note.

Key Insights

• Wells Fargo notes that the outlook for small caps improves with GDP growth, absorption of higher rates, and diminishing election uncertainties.
• Economists project GDP growth at 1.9% for 2025 and 2.0% for 2026, yet Wells Fargo sees a substantial potential for upward revisions in GDP, enhancing small caps' growth prospects irrespective of the presidential election outcome.
• The firm stated, "This dynamic may keep us in the [small cap] trade near term even with a Harris victory," as the Nov. 5 election approaches.
• Current betting odds favor Trump over Harris at 63% to 37%.

Historical Context

Wells Fargo highlights that small caps have historically outperformed in the three months following both Trump’s 2016 and Biden’s 2020 election victories. Both administrations were beneficial for growth stocks in the longer term.