After a long period in which the very largest stocks have dominated, signs are emerging that US smaller companies could be poised for a resurgence. Historically, smaller companies have tended to perform well when market concentration1 reaches extreme levels, and the current backdrop suggests this pattern could be starting to repeat.
Several factors are aligning to create this favourable environment – earnings growth from US small caps is accelerating, valuations remain reasonable and government policy could provide further support. With sentiment towards the sector improving and US small business optimism at a six-year high2, now could be a pivotal moment for investors to look beyond the index heavyweights and towards America’s dynamic small cap sector.
JPMorgan US Smaller Companies Investment Trust (JUSC) offers UK investors a disciplined and proven approach to capture this opportunity. By focusing on quality businesses with attractive valuations, the trust provides a compelling way to gain exposure to the companies driving growth at the very heart of America.
Growth picking up
Earnings growth from US small caps appears to be accelerating. In fact, for the first time in at least three years, the Russell 2000 Index is expected to deliver higher earnings per share (EPS) growth in 2025 than the S&P 500 Index.
In the industrials sector, for example, which is JUSC’s largest sector weight, many businesses are well-positioned to enjoy what many analysts expect to be a period of improving growth from the US economy, while also benefiting from reshoring trends, inventory rebuilding and increased investment in advanced manufacturing and automation. JUSC’s investment approach emphasises companies with durable business models and attractive valuations, positioning it well to identify and capture these opportunities.
Valuations remain reasonable
Despite signs of renewed interest in US smaller companies in the last few months of 2024, smaller companies continue to trade at reasonable valuations. Typically, smaller companies trade at a premium to large caps due to their higher growth potential. However, the current market environment presents an unusual dynamic – large cap valuations appear stretched, while small caps are generally much more reasonably valued and trade at a relative discount.
This divergence is rare and has historically tended to correct over time, suggesting an opportunity for investors should the traditional valuation relationship reassert itself. As a result, this could be an appealing entry point for those looking to gain exposure to a segment of the market with strong long-term potential.
Political tailwinds
With small caps more exposed to the domestic economy than their large cap counterparts, an improving economic backdrop should be particularly beneficial for this part of the market.
Meanwhile, US smaller companies could be given a further boost by government policy. The new Trump administration has signalled a strong focus on pro-business policies, including corporate tax cuts and domestic investment incentives, which should benefit smaller companies more than any other part of the economy.
From the perspective of America’s role in global trade, much of the recent focus has been on tariffs. Here too, there is a potential benefit for US smaller companies, which are, on balance, less exposed to tariff risk because they rely less on overseas trade.
Selectivity is key, however, as some US small cap businesses are highly dependent on international supply chains. This environment underscores the importance of active stock-picking, where experienced managers can navigate the risks and capture opportunities.
JUSC: A disciplined approach to small cap investing
JUSC employs a disciplined investment approach that focuses on high-quality businesses and buying them at attractive valuations. This strategy is led by Portfolio Manager Don San Jose, who has managed the trust since November 2008. He is supported by Co-Portfolio Managers Dan Percella and Jon Brachle, who joined the team in 2014 and 2017 respectively. Together, they have successfully navigated a wide variety of market conditions by consistently applying the same disciplined approach.
Importantly, the key characteristics of JUSC’s approach are clearly reflected in the data. The focus on quality is demonstrated in the portfolio’s high return on equity, while it also ranks highly on other measures of quality, such as those provided by BARRA analysis3. Moreover, from a valuation perspective, the JUSC portfolio trades on a lower P/E ratio than the index while also being forecast to grow faster this year.
Conclusion
Sentiment towards US smaller companies appears to be improving, with small business optimism recently hitting a six-year high. While performance has started to improve, the broader evidence suggests this may be just the beginning of a more sustained recovery.
There are risks, of course. Trump’s policies, while broadly supportive of growth, could prove more inflationary than the consensus has priced in. If the market begins to price in renewed interest rate hikes to combat inflation, smaller companies could face headwinds.
However, these risks can be mitigated through selectivity and JUSC’s enduring focus on quality. By employing a disciplined, selective, research-driven stock-picking process, Don San Jose and his team are confident the trust can continue to deliver significant long-term growth for its shareholders.
Ultimately, JUSC remains one of the few viable options for UK investors looking to gain exposure to the potential resurgence of US smaller companies – an opportunity that sits at the heart of America’s historic – and potentially future – economic success.