Earnings growth - a potential catalyst for small-caps

Earnings growth - a potential catalyst for small-caps

December 18, 2024

Earnings growth is a fundamental driver of small cap equity performance. Analysts are projecting strong earnings growth for small caps over the next 6 quarters, which may give them the push they need to begin outperforming large cap equities.

As shown in the chart below, year-over-year earnings growth for small-caps, as measured by the Russell 2000® Index, have been negative for five quarters, through 1Q24. Meanwhile, earnings growth for large-caps, as measured by the S&P 500®, has been positive since mid-2023.

In the 2Q24 earnings cycle, however, small-cap earnings growth overtook large-caps and analyst estimates are forecasting more than 20% earnings growth for the Russell 2000 Index through the first half 2026, marking an attractive entry point for investors.

Small-caps are projected to post strong earnings growth through 2025

Year-over-year earnings growth rate (actual & estimated)

Earnings growth a potential catalyst for small caps

Source: LSEG I/B/E/S; as of November 15, 2024

What this means for investors

Given recent outperformance of large-caps equities, investor portfolios may be underweight small-caps. Small caps are trading at a ~20% historical discount to large-caps*. Improved earnings growth for small-caps may provide a compelling catalyst for investors seeking to rebalance back into the asset class.

An actively managed small-cap fund offers the potential to outperform the benchmark through the cycle.

*Source: BofA US Equity & Quant Strategy, FactSet. As of November 30, 2024

[4087014]

Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and summary prospectus, which may be obtained by visiting delawarefunds.com/literature or calling 800 523-1918. Investors should read the prospectus and summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of March 2024, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies. • Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors. • REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the US stock market.

The Russell 2000 ® Index measures the performance of the small-cap segment of the US equity universe.

Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.

Macquarie Asset Management (MAM) is the asset management division of Macquarie Group. MAM is an integrated asset manager across public and private markets offering a diverse range of capabilities, including real assets, real estate, credit, equities, and multi-asset solutions. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide. Delaware Funds by Macquarie refers to certain investment solutions that MAM distributes, offers, or advises. Investment advisory services are provided to the Delaware Funds by Delaware Management Company, a series of Macquarie Investment Management Business Trust (MIMBT), a Securities and Exchange Commission (SEC) registered investment adviser. The Delaware Funds are distributed by Delaware Distributors, L.P., a registered broker/dealer and member of the Financial Industry Regulatory Authority (FINRA) and an affiliate of MIMBT.

Other than Macquarie Bank Limited ABN 46 008 583 542 (“Macquarie Bank”), any Macquarie Group entity noted in this material is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these other Macquarie Group entities do not represent deposits or other liabilities of Macquarie Bank. Macquarie Bank does not guarantee or otherwise provide assurance in respect of the obligations of these other Macquarie Group companies. In addition, if this document relates to an investment, (a) the investor is subject to investment risk including possible delays in repayment and loss of income and principal invested and (b) none of Macquarie Bank or any other Macquarie Group company guarantees any particular rate of return on or the performance of the investment, nor do they guarantee repayment of capital in respect of the investment.

All third-party marks cited are the property of their respective owners.

© 2024 Macquarie Management Holdings, Inc.