US small caps: why they remain an opportunity to consider

“The act of process of freeing someone or something.” This is how the Encyclopedia Britannica defines the word liberation, a term that has kept on gaining prominence after being chosen by the President of the United States to frame his global trade strategy. With all that it entails.

On the now-popular “Liberation Day,” which took place this past April 2, Donald Trump announced that a general 10% tariff will be imposed on all foreign products—effective starting April 9—with additional taxes that could reach up to 49% depending on the country of origin. For the European Union, the rate will be 20%; for China, 34%; and for Japan, 24%.

Thus, according to Trump, “one of the most important days in U.S. History,” which he described as a “declaration of economic independence,” had an immediate impact on the markets. The following day, April 3, saw what is known as “Black Thursday.” Both the S&P 500 and the NASDAQ suffered their biggest drops in a single day since March 2020, in the midst of the COVID-19 pandemic. Specifically, the S&P 500 fell by around 4.84%, while the Dow Jones suffered a correction of 3.98%. The NASDAQ technological index dropped by almost 6%.

Don’t overlook equities

“What now?” That’s likely the question running through the minds of many investors. In situations like this, most financial experts advise against being driven by fear of market declines and instead recommend taking a rational, measured approach.

"We believe that one of the most common errors that investors make during episodes of volatility is to abandon equities in favor of perceived cash security. While this may help investors sleep better in the short term, history suggests that it may be detrimental to long-term financial well-being,” explains Jonathan Boyar, director of Boyar Value Group and adviser of the MAPFRE AM Forgotten Value Fund.

In this regard, Boyar urges calm, reminding investors that “the market’s best days often occur during periods of heightened volatility.” That’s why, in his view, it’s crucial to maintain long-term exposure to equities, as “it is often the most effective path for investors.”

Opportunity in uncertainty?

Once investors have decided to commit to equity with a long-term vision despite the current volatility, they have to think about which positions could be key to the success of their portfolio.

Within equities and looking at the medium and long term, Boyar is clear about it and sees small caps in the US as a great opportunity. “The current environment offers us the opportunity to buy high-quality small caps with little coverage at prices that, in our opinion, are greatly reduced due to the prevailing uncertainty,” he says.

The swings of small caps

At this point, it is worth remembering the roller coaster experienced by small caps in recent months. They reached sharply positive levels following Trump’s victory in the race for the White House. In fact, the Russell 2000 index surged by 5.8% on the very day of the Republican’s win, hitting its highest level in three years.

“Immediately after his victory in the 2024 election, small-cap stocks jumped on hopes of a pro-business agenda, corporate tax cuts, and the belief that any imposed tariffs would disproportionately impact large-cap multinationals,” explains Boyar.

However, this good mood dissipated when the mandate officially began its legislature: volatility in administration messages and growing concern for property costs have reversed the positive trend. “As Trump’s messaging grew more erratic and consumer and business confidence wavered, small-cap stocks came under increasing pressure,” notes Boyar.

Lacking the negotiating power of large corporations, many small companies found it difficult to absorb the impact of tariffs and supply chain interruptions. As a result, “since Trump’s inauguration, the Russell 2000 small-cap index has fallen by approximately 10.4%, compared to a 5.4% decline in the S&P 500.”

Why invest in US small caps?

Nevertheless, according to Boyar, despite the market’s recent weakness, US small-cap stocks remain one of the most attractive areas for value-oriented investors with a medium- to long-term outlook. “The current valuations are attractive compared to their historical averages and in relation to the large caps that still seem expensive even after the correction of the first quarter,” he explained.

Boyar explains that one of the main attractions of investing in small caps is their lower coverage by Wall Street analysts, which generates inefficiencies that can be exploited by active managers. “The number of Russell 2000 companies with fewer than 10 analyst recommendations has increased by more than 70% over the past decade, creating fertile ground for uncovering undervalued opportunities.”

The expert also argues that the divergence in profitability between small and large capitalizations has reached extreme levels. “Historically, these large divergences do not tend to persist indefinitely, especially when the relative valuations of small-cap companies are at multi-decade lows.” If AI-driven mega-cap stocks enter a phase of adjustment, and small-cap stocks already reflect significant economic weakness, the stage could be set for a strong rebound in small-cap values.

“For now, investor sentiment continues to favor the perceived safety of large-cap stocks over the value in small-cap stocks. But for those willing to look beyond today’s headlines, we believe this skepticism presents a significant opportunity,” concludes Boyar.

Adaptation of the MAPFRE AM US Forgotten Value Fund

In spite of the recent low performance of the Russell 2000 Value, with a fall of almost 6% in the last month, MAPFRE AM US Forgotten Value managers see the present as an opportunity rather than a threat.

At February 28, 2025, this fund had an exposure of 39% to medium caps; 23% to small caps; 15% to large caps; and 13% to micro caps.

Historically, according to the expert, volatility has been part of the investment process in small caps with an average annual return of 9.2% since 2000, but also with average year-on-year declines of 20%.

In response to this environment, the fund has made strategic adjustments, abandoning companies with higher risks, such as Oshkosh, and reinvesting in companies with more favorable prospects. “We exited our position in Oshkosh due to company-specific risks related to a product line that could be negatively impacted by the Trump administration’s policies.”