Tom Lee says small cap stocks can outperform thanks to Trump win

Donald Trump’s second presidency could help supercharge small cap stocks further, according to Fundstrat managing partner and head of research Tom Lee. “Since 1987 small caps traded on a median price-to-earnings [ratio] at a premium basis to the S & P 500, and the S & P 500 is at 17 times. I think small caps could over the next couple of years outperform by more than 100%,” Lee told CNBC’s ” Squawk Box ” on Friday. The iShares Russell 2000 ETF (IWM) has already surged roughly 9% so far in November, and more than 39% over the past year, according to FactSet data. The fund sells at a P/E ratio of 65 versus 33.5 for the MSCI USA Small Cap Index, its segment benchmark. The smaller companies that populate the fund are viewed as outsized beneficiaries of tax cuts as well as a potential resurgence of the domestic economy, two key points of Trump’s 2024 campaign. Stocks soared on Wednesday after Trump won the U.S. election, reaching all-time highs. IWM YTD mountain iShares Russell 2000 ETF (IWM). Lee is also bullish on equities more broadly, and doesn’t limit his optimistic outlook to only small caps. He also forecast the S & P 500 could break above 6,000 before the end of the year and top 6,700 in 2025. The latter implies a more than 12% rise from where the index closed on Thursday. Lee also views Trump’s return to the White House as a continuing catalyst for bitcoin. “We know investors haven’t been adding risk, and now we have earnings visibility with a continued dovish Fed and this election is behind us, so multiple tailwinds exist,” he said. To be sure, Lee noted that some of Trump’s biggest proposed changes, including an extension of tax cuts from his first term that expire in 2025, could fall short of addressing the broader macroeconomic headwinds facing the U.S., most notably the rising deficit between government revenue and spending, and burgeoning federal debt. “It’s gonna be very difficult to fix the deficit with just changes in taxes and spending,” Lee cautioned. On Thursday, FundStrat launched a new fund, the Granny Shots US Large Cap ETF (GRNY). The actively managed fund includes some of Fundstrat’s top stocks that fit into favored investing themes. Its largest holdings include Tesla , Oracle and Crowdstrike .