This year, the rally has mostly been led by small-cap stocks as easy money encouraged investors to invest in higher-risk, higher-growth stocks. Further since the US economy appeared to have better outlook than many international markets, investors preferred domestically focused companies.
After the surge, smaller-cap stocks appear rather expensive. Russell 2000 ETF (IWM) now has a P/E ratio of 29.6 compared with 21.9 for the Russell Top 200 ETF (IWL).
Further, large-cap companies will benefit from the brightening global growth environment, as they derive almost half of their revenues from outside of the US. Also, most of these companies have huge cash piles on their balance-sheets and have been increasing dividends and buybacks. Going forward, they are likely to spend more on capital investments and hiring.
Another reason for investing in larger companies now is that many investors who continued to stay invested in bonds will begin to embrace stocks when they finally realize that the bull market in bonds is over. Being very risk averse, these investors tend to favor larger, stable, well-known companies over smaller riskier players
Do you think that large-cap stocks will outperform in 2014?
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