Small-cap stocks set to roar even higher, according to the charts

The 2024 election produced a ‘red sweep’ as Republicans look likely to maintain control over the House. As a result, the outlook is for the Republican administration to foster a more pro-growth environment that reduces regulatory constraints. The small cap Russell 2000 index contains domestic companies that should benefit in a protectionist, on-shoring environment as long as inflation and rates stay contained. Small caps are more exposed to elevated interest rates via their cost to borrow versus large-cap stocks that can issue debt at a rate that reflects the quality of their income statement and balance sheet. The monthly chart of the Russell 2000 shows a pending breakout from all-time highs of 2,459. Using a Fibonacci and Elliott Wave projection, the minimum target according to this school of market analysis is 70% higher at 4,157, achievable in my opinion in the next 24-months. Looking at the lower panel you’ll see the Russell 2000/S & P 500 ratio that has been downtrending since 2011. Put in simpler terms the Russell 2000 small cap index has underperformed the large cap S & P 500 index for the past 13 years. Should the ratio move above the blue dotted line that trend could be reversing. (Editor’s note: Small caps can be invested in through many ETFs like the iShares Russell 2000 ETF (IWM) .) Drilling down to the sector level within the Russell 2000 we put together a percentage change chart since the August 5th summer swoon lows. The sectors leading both the Russell 2000 and the S & P 500 are the utilities and industrials. Utilities have a huge catalyst of a massive increase in power demand amidst the on-going AI boom. Data centers require a lot more power. Individual stock plays MGE Energy is one potential utility name to invest in the theme. This is a $3.8B market cap company paying a 1.70% yield that just beat Q3 earnings with 7.6% and 4.95% quarterly EPS and sales growth respectively compared to the same quarter last year. EPS in 2025 is expected to grow another 9.21%, but is expected to be revised higher in coming quarters, provided the market continues to focus on the power boom. The stock is a bit extended so patience is required here to nibble at current prices, but increase position size on any pullback towards $100. Risk is defined provided the stock stays above the mid-2024 consolidation at $94.00 Industrials are also moving due to Trump’s protectionist focus on domestic manufacturing. The small cap Industrial ETF just broke from a consolidation around $135 and is still in the earlier stages of the expansion. A name we’ve highlighted before in this space is Powell Industries on March 23rd @ $144 and currently hold in our growth portfolio at Inside Edge Capital. The stock is trading at $341 and is also a bit extended so if you keep this idea on your radar and see a pullback towards $300 this could be an attractive holding. The company is expected to grow EPS 185% this year compared to 2023, but then moderate growth a bit in 2025. The forward valuation is 28 times 2025 earnings so not egregious for this high growth small cap industrial name. -Todd Gordon, Founder of Inside Edge Capital , LLC DISCLOSURES: (Gordon owns POWL personally and in his wealth management company Inside Edge Capital. Charts shown are MotiveWave.) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.