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What Analysts are Predicting for Small Caps in 2022

According to Francis Gannon, Chief Investment Officer of Royce Investment Partners, small cap indices are set to draw broad participation in 2022 as the economy improves. Though Gannon attributes potential risks to things like the Fed’s rising rates and volatility surrounding the pandemic and political climate as midterms approach, he only predicts a slight rise in volatility this year. Naming industrials, financials, and information technology as the top-performing small caps in the final quarter of 2021, Gannon cites them as areas with great opportunity. ​

“Small caps today are about 8% below their most recent high and yet, fundamentals for many of the businesses continue to improve,” Gannon told Yahoo Finance. He also noted that the equal-weighted index – the Russell 2000 – performed better overall than the cap-weighted index. Overall, Gannon expects “muted returns” in the market along with the undervaluation of small cap equities.

When Royce Investment Partners talked to several of its portfolio managers regarding their 2022 outlook for small caps, most agreed that while the risks mentioned above exist, small caps still hold potential, especially in response to inflation. “We often tell clients that the more concerned you are about inflation, the more you may want to be leaning into small cap and away from high-valuation stocks,” says Senior Investment Strategist Steve Lipper.

As always, analysts recommend using caution and good investment strategies, while small caps at least provide less of a risk overall compared to large cap stocks. Kiplinger even compiled a list of 12 small cap stocks Wall Street analysts think have potential for the year.


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