Small Caps Revived as Investors Set Sights on U.S. Tax-Cut Plan

Trump's Tax Plan: Corporate Rates and Few Details

Whether Washington can push through tax changes has yet to be seen. But one thing is for certain: The prospect alone is giving smaller U.S. companies a boost in the stock market.

Small-cap stocks -- as measured by the Russell 2000 Index -- climbed to a record high for the third session in a row Wednesday, outperforming the S&P 500 Index of the largest companies. That was a reversal from the prevailing trend this year, in which the behemoths outperformed their smaller counterparts.

The little guys tend to get more of their sales from the U.S., so the thinking goes that they stand to benefit more from economic growth spurred by lower domestic taxes. Trump and Republican leaders announced some details of the proposal Wednesday that would lower the corporate tax rate and contain trillions of dollars in breaks for the highest earners.

Lower levies add to a list of factors likely to give small caps the edge going forward, according to Jim Paulsen, the chief investment strategist at Leuthold Group. He also cites a favorable economic backdrop, a weakening dollar and faster inflation as bullish drivers.

“Tax cuts are also going to help smalls more than large,” Paulsen said. “That change in cost is going to have a much bigger impact to smaller companies on a very tight profit margin.”

The Russell 2000 rose as much as 2.1 percent, the biggest intraday gain since November. The S&P 500 was up 0.5 percent as of 2:26 p.m. in New York, and has lagged behind the small-cap gauge for six consecutive days.

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