Trump 2.0 Macro-Outlook Favors Small & Mid-Caps

The GOP’s surprise sweep has pushed an already epic market rally into overdrive.

The S&P 500 is up a scorching 24% YTD. That’s on top of last year’s impressive 24.2% ramp.

Should investors blindly buy all stocks? Not particularly.

The Trump 2.0 macro-outlook favors small- and mid-caps.

Now, you may be wondering why investors are suddenly excited for a Republican sweep? It boils down to history.

Let’s first digest large-cap historical performance to get a reference point.

Here’s a great fact. President Trump oversaw better market gains than any other Republican President in the post war era.

The S&P 500 averaged 14.6% gains in his first term. That’s more than double the post-war, Republican presidential average of only 7.1%. Also, it smokes the Democrat’s 11.3% average too (chart).

But there’s a lot more to the Trump trade than just history.

Today, we’ll show you what a Trump 2.0 setup means for the stock market. Then we’ll highlight why SMID caps have the most leverage to this powerful new macro narrative.

We’ll start out by looking at a longer-term datapoint.

Investors Love a Red Wave

Republican control of the White House, Senate and House of Representatives has positively reshaped the macro landscape overnight.  

Stocks have historically done very well with the GOP in full control of the government.

Since 1945, the S&P 500 has averaged 12.9% annual price gains during red waves vs. much weaker returns when Republican presidents had to contend with Democratic or split Congresses (chart).

OK, so history says investors love a red wave. Let’s dig deeper to learn which stocks could outperform most.

Bet on Pro-Cyclical Leadership

Long-term interest rates are up roughly 19% since early September. With CPI inflation at just 2.6%, the clear takeaway from the ramp in 10-year Treasury yields is that investors expect stronger economic growth.

A red wave is fanning traders’ economic optimism…Republicans’ narrow Congressional majorities notwithstanding.

The Trump administration’s corporate tax and regulatory regimes will be much less onerous. That should lead to a resurgence in long-subdued M&A activity. And growth will also benefit from lower taxes on consumers.

As for tariffs, the Trump administration’s bite may not be as bad as the Trump campaign’s bark. If tariffs are used surgically, don’t expect them to spike inflation and otherwise undermine Trump’s overall pro-business agenda.

Against this optimistic macro backdrop, more economically sensitive trades like small-caps, mid-caps and large cap cyclicals are outperforming while defensives lag badly (chart).

This is where the rubber meets the road for your portfolio.

Trump 2.0 Macro-Outlook Favors Small & Mid-Caps

We’ve long been constructive on smaller capitalized firms. On May 13, we published Six Big Reasons to Like Small Cap Stocks. We forecasted a 25% small-cap rally over the next 12 months. Fast forward six months to today and the S&P Small Cap 600 Index is up 15% so far. We aren’t backing away from this stance. we’re doubling down on our bullish small-cap call. The election has turbocharged the bull case.

Here are the top 3 reasons why:

Reason #1 the Trump 2.0 macro-outlook favors small- & mid-caps is the cyclical slant.

Small- and mid-caps are super-cyclical compared to the S&P 500. That’s thanks to their 52% and 54%, respectively, combined weightings to financials, industrials and discretionary vs. only 32% in the S&P (chart).

Small- and mid-caps also have a lot less technology exposure (chart).

Tech’s reliable, evergreen organic growth means it outperforms most when growth is slow or investors are anxious about a slowdown.

Right now, the opposite is true as a red wave has investors expecting growth to pick up.

To be clear, we’re not tech bears. Other cyclical plays just have more tactical leverage to the Trump trade.

Reason #2 the Trump 2.0 macro-outlook favors small- & mid-caps is the GOP political scenario.

The Republican sweep gives investors increased confidence in accelerating economic growth. That’s boosting confidence in lofty 2025 consensus earnings forecasts.

Small- and mid-caps have the most to gain from this positive macro re-appraisal. That’s because they’re forecasted to post faster 2025 profit growth than large caps.

The S&P SC 600 and S&P MC 400 are estimated to post 24% and 17.1% 2025 EPS growth, respectively, vs. only 14.5% for the S&P 500 (chart).

Before the election, confidence in forward EPS estimates was low. Economic nervousness kept investors from paying up for SMID stocks.

That caution is fading as GOP control has investors more upbeat on the economy. That’s finally unlocking higher valuations for SMID equities. We expect this bullish re-rating to continue well into 2025.

Reason #3 the Trump 2.0 macro-outlook favors small- & mid-caps is the fact that money is flowing there.

At MAPsignals, you know we love to follow the flows. Small- and mid-cap stocks are seeing much greater institutional buying than large caps right now (chart).

Since the day after the election, 82% of all Big Money inflows have chased companies below $50 billion in market cap:

Here’s the Bottom Line

We’re doubling down on our bullish small-cap call. The red wave has turbocharged the bull case.

Stocks have historically done very well with the GOP in full control of the government.

The outlook for small- and mid-caps is even brighter as the red wave fans investors’ economic optimism, boosting confidence in lofty 2025 consensus earnings forecasts.

SMID caps also have the most to gain from this macro re-appraisal. Small- and mid-indexes are super-cyclical compared to the S&P 500 and are forecast to post faster 2025 profit growth than large caps.

That’s finally starting to unlock higher valuations outside of mega-cap stocks.

Throw in outsized institutional money flows as a powerful inflection point and you’ve got a recipe for further gains ahead.

If you’re wanting to get specific financial, industrial, and discretionary stocks supported by Big Money support, get started with a MAP PRO subscription. 

It’ll get you access to our portal that updates every morning, showcasing the stocks getting bought and their scores. That’s how we spot outliers.

There are plenty of cyclical small- and mid-cap names to leverage the Trump 2.0 rally. Use a MAP to find them!

Invest well,

-Alec