Trends can change over time, too, and one that has been building over the last several years is the growing dispersion between overvalued and undervalued, or large-cap stocks over small-cap stocks, a good example of just such a shift in course.
In a world where globalization is game-changing and scale has its efficiencies, large-cap companies have, up until now, benefited from many outsized advantages like pricing power, regulatory reach, logistical control, and supply chain access, to name just a few. For years, large-cap companies have been able to lean into their size and dominate markets.
However, I believe that the trend toward deglobalization and advances in technologies, including artificial intelligence, are now helping small- cap companies gain ground vs. large-cap companies. For example, the very local nature and size of small-cap companies allow them to be nimble and fast as reshoring efforts gain steam, beating multinationals as they lumber to unwind and adjust. Similarly, new technologies like AI are helping with optimization, democratizing an environment that has long been one-sided.
So, what does this shifting trend say about valuations, then, when we think of value as the ability to create efficiencies and efficiencies are no longer an unequal reward? Will premium come out of price for large caps? Will the playing field level for small caps, which for years have suffered relative to their peers? Today, as we rethink the valuation differentials between large and small, and we look to uncover attractive opportunities for our clients, select small-caps begin to shine.