2025 was supposed to bring a Trump bump, but so far it's been nothing but panic and volatility. Small caps have felt this pain most acutely, with the Russell 2000 down nearly 12% since Inauguration Day.
Small-cap stocks tend to swing dramatically with economic cycles and interest rate shifts. So when President Trump reignited tariff fears, small caps bore the brunt.
Despite the turbulence, betting against small caps now could be a mistake, according to Chris Clark, CEO and co-chief investment officer of Royce Investment Partners.
Clark studied past periods of “peak fear” and found large selloffs often signal exceptional buying opportunities for small caps.
“Our research shows the Russell 2000 typically delivers stronger average annualized three-year returns than the Russell 1000 following periods of extreme volatility,” Clark explained.
In other words, small caps historically outperform after episodes of intense fear — and continue doing so for years.
As Clark put it, “We welcome short-term volatility as the groundwork for building market-beating returns over the long run.”
Top small-cap stocks to watch
Despite current market jitters, small-cap valuations remain appealing.
Analysts at BNP Paribas project significant earnings growth for Russell 2000 companies in 2025 and 2026 on the back of expected Fed rate cuts among other reasons.
Companies with compelling growth narratives stand to benefit the most once economic anxiety fades.
AI solutions firm BigBear.ai (BBAI) is down 71% from last year's highs. Though some sell-off was warranted after recent accounting concerns, BigBear delivered strong revenue growth in 2024, driven by major contract wins.
The company is actively improving its balance sheet and projects revenue of up to $180 million in fiscal 2025. With increasing interest in AI spending, BigBear appears poised to recover.
Elsewhere, real estate brokerage Redfin Corporation (RDFN) has struggled through the post-Covid housing slowdown, as high rates kept buyers sidelined.
Redfin reported a significant net loss of $164.8 million in 2024, yet revenue growth has been positive for four straight quarters. Demand should pick up again as mortgage rates ease amid anticipated Fed rate cuts this year.
Shipping and ecommerce firm Pitney Bowes (PMI) largely avoided recent market turmoil, thanks to strong earnings and upbeat forecasts for 2025. The company announced a new $150 million share buyback and an increase in quarterly dividends.
Pitney Bowes expects revenues of up to $2 billion and adjusted EBIT earnings of $450 million in fiscal 2025, driven by aggressive cost-cutting measures. According to its latest earnings report, annualized cost savings could reach up to $190 million this year.
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