3 reasons an overlooked area of the stock market is poised for 50% gains this year, according to Fundstrat (2024)

• Small caps will outperform the S&P 500 by at least 50% in 2024, according to Fundstrat's Tom Lee.
• Projected earnings, valuations, and revenue growth of small-caps are set to outshine large-caps in 2025.
• Lee highlighted parallels with 1999 when small-caps outperformed by 650 basis points annually, totaling a cumulative 113% over 12 years.

Investors fixated on mega-cap names might be missing out on potential in a more low-key corner of the stock market, which is set to unleash huge returns in 2024, according to Fundstrat.

"Our top idea for 2024 is small-caps, where we see at least 50% upside," Fundstrat's head of research Tom Lee said in a note on Wednesday, noting that small caps are so disdained by the market that even a "wrong-way Charlie" can confidently bet against their success.

Lee, who nailed his 2023 stock market forecast, laid down three fundamental reasons to take a closer look at this unloved segment of the roaring US equities market.

First, Lee notes that Russell 2000 firms are poised for substantial revenue growth, outpacing the S&P 500 by a significant margin in 2025 from 2024 thanks to the Fed's potential rate cut this year.

"Now, you may be surprised, but small-caps actually have faster revenue growth. 6.9% versus 5.5%, that's 140 basis points faster or nearly 25% faster growth, and that's true in every quintile" Lee said in a video on the topic posted this week.

Second, Lee also highlighted small-caps' earnings growth potential, projecting 19% growth is earnings-per-share, outpacing the S&P 500's 12% EPS growth. He said small-caps have an advantage in their lower P/E ratios compared to large-cap stocks, making them look more affordable to investors.

Finally, the Fundstrat CEO noted that institutional investors have been dumping small caps for years, making them ripe for a turnaround trade.

"[M]ulti-cap investors have multi-decade low allocations to small-caps even as small-caps have begun to outperform. We see this performance chasing as a key factor for small-caps to sustain gains," he added.

The conditions setting small caps up for a big rally mirror the situation in 1999, Lee wrote, when the sector embarked on a streak of outperformance that lasted more than a decade.

"In 1999, this was also the same exact launch point for 12-years of outperformance. From 1999 to 2011, small-caps outperformed by 650bp annually and a cumulative 113%."