Have you ever been caught in a “perfect storm”?
No, I’m not talking about the recent snowstorms we’ve had across much of the U.S.
According to one definition in the Collins Dictionary, “A perfect storm is an unusual combination of events or things that produce an unusually bad or powerful result.”
This is the type of perfect storm I’m talking about.
The reality is we’re facing a perfect storm for small-cap stocks. And I want my readers to be prepared to profit from what’s coming.
So, in today’s Market 360, I’ll give three reasons why a perfect storm is brewing for this group of stocks in 2025. I’ll also share how you can find small-cap stocks with superior fundamentals so you can stay on the right path to profits this year.
What’s a Small-Cap Stock?
Before we get into it, I want to first explain what a small cap is.
Small-cap companies are companies whose total market value, or market capitalization, ranges from about $300 million to $2 billion. Large-cap stocks, in comparison, have a market value of $10 billion or higher.
The appeal of small-cap stocks is simple. Because they’re small, there is greater potential for big gains. After all, who hasn’t dreamed of owning the next Apple Inc. (AAPL) or Amazon.com, Inc. (AMZN)?
But the reality is that with greater growth comes greater risk and volatility. If you pick the wrong small-cap stock, you could do some serious damage to your portfolio.
On the flip side, if you pick the right small-cap stock, you could find yourself with a big winner.
With that said, let’s dive into why I think small caps are set to thrive in 2025…
Reason 1: The U.S. is an oasis
The first reason is that the U.S. is an oasis in a world of chaos.
I won’t get into what’s going on in Ukraine or in the Middle East. But even aside from wars and conflict, the truth of the matter is that much of the world is in a recession or on the verge of a recession. And a lot of these economic woes are due to leadership crises and political unrest.
This has been particularly apparent from our neighbor to the north.
On January 6, Canada’s Prime Minister Justin Trudeau bowed to pressure and resigned amid mounting crises and threats of tariffs from President Donald Trump.
Canada, though, is far from the only country facing political chaos right now. In Europe, Germany and France are experiencing some of their own chaos.
Germany has elections scheduled for February, and many anticipate that the Alternative for Germany (AfD) party will win the election. The AfD is pushing for stricter immigration policies, restarting shuttered nuclear plants and cutting oppressive taxes.
Meanwhile in France, French President Emmanuel Macron’s party has a minority in Parliament. Marine Le Pen’s National Rally Party holds the majority of seats in Parliament and continues to undermine Macron’s authority, especially when it comes to spending. If the National Rally Party’s budget demands are not accepted, it could topple Macron’s fragile ruling coalition.
The good news is that we don’t have as significant levels of political chaos or recession fears in the U.S. – and as a result, I suspect the U.S. will remain the economic growth engine of the world.
In fact, if Trump 2.0 is successful at ending the manufacturing recession and the senseless wars overseas, then the U.S. economy could very well grow between 4% and 5% in 2025. Additionally, if President Trump makes the government more efficient, we may briefly hit 6%.
We’ve never experienced that kind of growth before – and it could be especially good news for small caps.
Reason 2: A strong U.S. dollar benefits small caps
The second reason is that the U.S. dollar is incredibly strong right now, as you can see in the chart below.
This benefits small caps significantly.
The reality is, with a strong dollar, everything we’re importing is getting cheaper. This means consumers have more purchasing power, which means they are likely to spend money domestically, too – which helps some small-cap companies.
It also helps small-cap companies that rely on imported raw materials or goods to make their products, since these inputs will be cheaper.
On the other hand, countries with weaker currencies are experiencing inflation. The Brazilian real was down 21% against the dollar last year, and the Mexican peso was down 19%. Europe is also experiencing this, and the British pound is struggling as well.
In fact, I would not be surprised if the U.S. dollar continues to strengthen against its peers. Parities with the euro and the British pound are a very real possibility in 2025.
All of this is important because a strong U.S. dollar impedes the sales of the larger, multinational stocks in the S&P 500 simply because approximately half of their sales come from outside of the U.S.
As a result, domestic stocks tend to prosper when the U.S. dollar is strong and small- and mid-cap stocks are more domestic in nature.
Reason 3: Rates should continue declining
Now, the third reason is something that I have consistently argued. It’s that the Fed will continue cutting rates this year – perhaps as many as four times. And this is very good news for small caps.
Here’s why…
Inflation is cooling and should continue to do so. You may recall that the Consumer Price Index (CPI) did increase 0.4% on a monthly basis in December. But the core CPI, which excludes food and energy, only rose 0.2%. That was a deceleration from a 0.3% increase in November. Also, on an annual basis, core prices increased by 3.2%. That was the first time since July that year-over-year core CPI growth slowed. (You can read more about the latest inflation reports here.)
Given the cool inflation reports, Treasury yields have pulled back from their recent highs on the rising hope that the Fed will continue to cut key interest rates this year.
I should also add that when global central banks start to cut rates even more in order to stimulate their struggling economies, this will increase pressure on the Fed. That’s because global bond investors will seek a better rate of return by purchasing U.S. treasuries. This will push our market rates down. And since the Fed doesn’t like to fight the bond market, they will likely cut rates in response.
Bottom line, I expect to see worldwide rates collapse this year. Our rates will come down as a result, and our Fed will probably end up cutting at least four times this year.
This is all good news for small caps.
They are some of the biggest beneficiaries of lower interest rates. Smaller companies tend to have bigger debt loads than larger companies, and when interest rates decline, they benefit handsomely.
For example, loan payments are easier to pay off and can use more capital toward growth initiatives. This helps small caps grow faster than their large-cap peers.
How to Stay on the Path to Profits in 2025
Add it all up, and it’s clear to me that a perfect small-cap storm is on the horizon in 2025. But in order to ensure you’re best positioned to profit, you’ll want to make sure you have a proven, powerful system at your back.
That’s why I’ve relied on Stock Grader (subscription required), which I’ve perfected over the past four decades, to help me identify market-beating picks year after year.
In fact, my system gave a “buy” rating to all of the top 30 performing stocks of Trump’s first term. So, chances are good that we’ll find more than our fair share of winners during Trump 2.0.
And as the backbone of my Accelerated Profits service, Stock Grader can help ensure we’re on the right side of history – and make quick gains as a result.
Using Stock Grader, I’ve found five stocks that are likely to benefit from the Trump 2.0 agenda. Four out of the five picks are either small-cap or mid-cap stocks, so there is plenty of room to run…
And not only do they boast strong underlying fundamentals – but they are also experiencing strong buying pressure – meaning they’re likely to deliver some fast, powerful gains to investors who act quickly.
(Already an Accelerated Profits subscriber? Click here to log in to the members-only website.)
Sincerely,
Louis Navellier
Editor, Market 360
