Macro & Market Views

It (May Be) a Small World After All

It (May Be) a Small World After All

Small Cap Team

After strong outperformance in 2022, value stocks—and small cap value stocks, in particular—have trailed growth stocks significantly thus far in 2023 as investors crowded into a very narrow cohort of megacap technology-related names.

Key Takeaways

  • While early 2023 favored small-cap stocks, investors soon returned to the megacap names so successful in the immediate aftermath of Covid-19 on expectations that the end of the Federal Reserve’s rate-hike cycle was near.

  • Though small cap stocks—and small-cap value stocks, in particular—have significantly lagged year to date, longer-term performance trends and stretched relative valuations suggest the potential for resurgence.

  • Small caps are a particularly volatile and inefficiently priced segment of the US equity market, and these dynamics often create opportunities for disciplined active managers to identify undervalued small cap names with specific catalysts for earnings recovery.

  • First Eagle’s Small Cap team employs a disciplined, research-intensive investment approach to identify temporal weakness in otherwise solid companies while avoiding “value traps” that are cheap for a reason.