Why Small-Caps “Trumped” Large-Caps Last Week

November 16, 2016 | Nat Kellogg, CFA, President

The election of Donald Trump last week caught the market by surprise and created a significant amount of volatility and dispersion across the U.S. equity market. One area of note was the huge outperformance of small-caps (up 7.7% from November 8–11) vs. large-caps (up 1.2% November 8–11). The Republicans made it a clean sweep Tuesday night, winning the White House and maintaining control of the House of Representatives and the Senate. While there is a lot of policy uncertainty as a result of this election, the market now believes there is a high likelihood of corporate tax reform being passed some time in 2017. Donald Trump’s plan calls for a reduction of the corporate rate from the current level of 35% (one of the highest rates in the world) to just 15%. Paul Ryan previously put forward a plan for corporate tax reform that would lower the rate to 20%.

While a cut in corporate taxes is likely to benefit all companies, our chart of the week shows that small-cap companies pay a much higher effective rate (i.e., the rate they actually pay after deductions and credits) than their large-cap peers. This is primarily because large multi-national companies generate a significant portion of their earnings in lower tax countries, while small-cap companies tend to be domestically focused, and thus pay very close to the U.S. statutory rate.

If the corporate tax rate is cut to 20%, this will result in a much larger increase in earnings for small-cap companies compared to large-cap firms (shown by the green dots on the graph). Optimism that this increase in earnings from a tax cut will materialize at some point next year is one of the key factors that drove the outperformance of small-caps last week.

Nat Kellogg, CFA

Get to Know Nat

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Related Content


The “Fix” Is In!

The strength of the U.S. economy over the last several quarters has surprised many investors, as consensus expectations from the…


The Emergence of Argentinian Equities

Argentina has faced myriad economic headwinds in recent time, including hyperinflation, currency-related difficulties, and a series of defaults on its…


Is Bitcoin Fairly Valued?

Despite mixed performance to start 2024, bitcoin finished the first quarter up roughly 68%. Buoyed by a broad weakening of…


1Q 2024 Market Insights Video

This video is a recording of a live webinar held April 25 by Marquette’s research team analyzing the…


Mind the Gap

Any ride on the London Tube reminds riders to mind the gap: Beware the space between train car and platform…


Japan: This Year’s Vacation Recommendation

Foreign investment isn’t the only thing streaming into Japan. In 2023, the number of travelers to the country surpassed long-term…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >