US small caps are the investment opportunity not to be missed in 2024

Not many predicted a SP500 rally of this size in 2024 last year.
The S&P 500 SPX stands, as of March 21, at 5,240, another all-time high, and is already at 20th this year.
This context pushes analysts to accelerate their year-end target for the SP500 index upwards.
Goldman Sachs and Societe Generale now see 5,500 as the year-end target for the stock index.
In a note published last Thursday in the usual "Morning Briefing", Yardeni Research, the research company of Prof Ed Yardeni, stated that 5,400 is achievable by the end of December, and if this happened then 5,800 would be the target for the end of 2025: "In other words, we think that the bull market has staying power, given the current macro-economic conditions and the earnings performance of American companies." And, since I have been reading Yardeni's analyzes for a long time, I can tell you that it is not easy to find the professor in question so bullish on the financial markets.
For those who have a Linkedin account and are curious to read the March 11 report, here it is: 'Pent-Up Exuberance' (linkedin.com).
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I'll explain how (and why) At this point, it doesn't matter whether there are uncertainties arising from the Fed's monetary policy, concerns about the overvaluation of the Hi-Tech sector, geopolitical angst over the Russia-Ukraine war and the war in the Middle East, or regulatory concerns of the kind that accompanied the latest drop in Apple's (AAPL) share price following the US antitrust investigation.
Yet the market continues to rise.
It is therefore clear to everyone that there remains, in the background, a robust and resilient demand for shares among investors.
You can also notice this from the fact that in recent times the market corrections are very short, and as soon as the indices slip a little, 2 or 3 days later the money flows back into the equity world.
A very robust propellant this year will be the buy-back operations carried out by those companies that have accumulated a lot of cash in their balance sheets in the last three years.
When a company has excellent cash flow, it can use it to make investments (this is the case of Nvidia), or distribute it to its shareholders in the form of a dividend, or proceed with the repurchase of its shares on the market.
Or all three of these procedures.
According to forecasts by Goldman Sachs bank, US stock buybacks will grow by 13% in 2024, reaching $925 billion as of December 31 this year, and will rise by 16% to reach $1,075 billion in December 2025.
According to this GS report, from 2000 to 2023, companies in the SP500 Index and Nasdaq purchased a net 5.5 trillion U.S.
stocks – a function of stock buybacks and cash M&A activity.
In 2023 alone, companies were net buyers of $565 billion in US stocks, the strongest year in buybacks since 2018.
A crude but useful estimate to give an idea of the scale of the phenomenon, predicts that the cumulative size of buybacks will reach $625 billion in 2024, fueled by 8% growth in earnings per share for the S&P 500 (i.e.
buybacks will be fueled by companies' own money and not debt, which very important), although the bull market will also lead to a rebound in IPOs and therefore more stock issuance.
In addition to the rally fueled by share buybacks, the American stock market will be helped by the three rate cuts that the Fed will implement in the second half of 2024.
The prospect of an easing of the Federal Reserve's monetary policy together with solid economic growth it will push families to move funds from money markets (with rates expected to fall) to stock markets.
The American people faced with falling Treasury coupons will see dividends and stock profits as more attractive, there is no doubt.
In fact, currently in the USA, money market assets owned by families amount to 3.8 trillion dollars, the highest level ever recorded and approximately 1.5 trillion dollars above pre-pandemic levels, that is, if we refer to January 2020 (source: Federal Reserve).
We have already written in previous articles that 2024 will be a positive year for stocks and especially for the American stock market.
This time, however, it is worth delving deeper into the fact that, in addition to buying ETFs on the SP500 index, it is a good idea to start buying ETFs on US small caps, i.e.
those belonging to the Russell 2000 index.
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I'll tell you why According to many analysts, small-cap stocks are poised to record a major outperformance in 2024.
The most excited of all about the Russell 2000 index is Tom Jong Lee of FundStrat Avisors, an independent research firm that has been active in the stock market for many years American.
Lee became confident that the small-cap Russell 2000 RUT index will rise 50% in 2024 and reach the top 3,000 for the first time, after the index posted its best daily advance in more than a month on Wednesday.
I remind you that today the Russell 2000 is worth 2,100.
The CNBC interview can be found here.
In essence, Tom Lee said that American small caps are likely to be the stocks that will receive the biggest boost from the Fed's interest rate cuts, an opinion shared by many Wall Street analysts and traders.
In fact, Russell 2000 small caps outperformed the Nasdaq and SP500 on Wednesday, after top Federal Reserve officials remained firm on their projections of three interest rate cuts in 2024.
Cheaper valuations than the S&P 500 in terms of P/ E and P/CashFlow should help spur small-cap demand in 2024, Lee said.
Within the Russell 2000, reliable and profitable small-cap companies are valued at 11 times earnings on average, Lee said.
As far as I know, Tom Lee looks at the FactSet database.
And according to FactSet data (an American financial data and software company based in Norwalk, Connecticut), such a low average P/E multiple represents a real bargain compared to the P/E multiple of 21x of the S&P 500 in mid-March 2024.
This year's bullish Russell 2000 advance could be just the beginning.
According to Lee, the valuation gap between small- and large-cap stocks is reminiscent of 1999, when profitable small caps with impressive EBITDA margins on revenue began a 12-year period of outperformance that saw them outperform their large-cap counterparts.
'Large-cap SP500.
The composition of the index could also work in its favor.
It has many biotech stocks, which have gained momentum recently, as well as many regional banks, which could benefit from the Fed's rate cut that will ease some of the pressure on their businesses.
To invest in the Russell 2000, always with a view to diversification and consistently with your risk profile and your time horizon (at least 5 years), I highlight the ETFs that you can use to enter the Russell 2000: SPDR Russell 2000 US Small Cap UCITS ETF ISIN: IE00BJ38QD84 Ticker: R2US Fund size: 2.6 billion euros Number of securities in portfolio: 1770 Xtrackers Russell 2000 UCITS ETF 1C ISIN: IE00BJZ2DD79 Ticker: portfolio: 1500 read also How to set up the investment portfolio for 2024? These securities cannot be missed DISCLAIMER The information and considerations contained in this article should not be used as the sole or main support on which to make decisions relating to investments.
The reader retains full freedom in his own investment choices and full responsibility in making them, since he alone knows his risk propensity and his time horizon.
The information contained in the article is provided for informational purposes only and its disclosure does not constitute and should not be considered an offer or solicitation to the public for savings.