How small cap managers are adjusting their portfolios in the wake of the U.S. elections

Executive summary:

Small cap managers are optimistic about sectors poised to benefit from the economic growth and pro-business policies that are expected from the incoming administration. As a result, they’re increasing positions in finance, software, and industrials.
Core and value managers are positioning portfolios for a potential surge in mergers and acquisitions, particularly in financials and healthcare, due to expected regulatory easing when the new administration takes office. Energy and healthcare sectors are also being revisited for stocks that could benefit from shifts in government priorities, especially in areas like LNG (liquified natural gas).
Managers are cautiously reducing exposure in interest-rate-sensitive and government-dependent sectors, such as housing and utilities, due to inflation concerns. They are also monitoring sectors that could be impacted by federal budget cuts or the imposition of tariffs.

Small cap stocks soar after U.S. election results. How are small cap managers responding?

With the Russell 2000 Index rallying in response to the U.S. election results—the benchmark index of small cap stocks soared by nearly 6% on Nov. 6 alone—small cap managers are re-evaluating their positioning ahead of President-elect Trump taking office in January.

At Russell Investments, our unique relationship with underlying managers gives us special access to the latest views from the small cap universe. In the wake of the election, we’ve tapped into these insights to see how small cap managers are adjusting their portfolios as the new administration prepares to take over in January. The response across core, value, and growth styles highlights some common themes, but each reflects a unique approach to navigating the new political landscape. Here’s a closer look at where managers are leaning, why, and what we might see moving forward.

1. Cyclical confidence: Riding the rally with cyclical stocks

Across the board, small cap managers are showing confidence in the sectors that stand to gain from economic growth and reduced regulation—two key objectives of the incoming U.S. administration. Growth-focused managers, for instance, see the election outcome as a reason to lean further into cyclical, high-growth opportunities. They’re adding positions in finance, software, and even some select industrial stocks, expecting these sectors to benefit from an environment that could foster economic expansion.

Core managers, too, are looking to capture gains from the anticipated “risk-on” sentiment in the market. They’re seeing opportunity in the Russell 2000 rally, particularly for cyclical and micro-cap names that historically perform well in pro-business policy environments. Though they’re mindful of risks, core managers are actively balancing their portfolios to catch a potential sustained rally in small caps.

2. Selective additions: Playing the long game with M&A and sector-specific bets

For value and core managers, there’s a strong focus on positioning for a possible surge in M&A (mergers and acquisitions) activity. With expectations that the new administration might ease regulations on M&A, particularly in financials and healthcare, managers are strategically holding acquisition-ready companies that could benefit from a friendlier regulatory environment. Financial stocks, especially regional banks, are getting extra attention from core and value managers who see potential gains from anticipated changes in regulatory policies.

Beyond financials, these managers are also revisiting energy and healthcare. They’re examining companies within these sectors that could stand to gain from shifts in government priorities. For example, certain energy stocks are poised to benefit from deregulation benefits, particularly in liquefied natural gas (LNG). These sector-specific adjustments are allowing managers to stay nimble, making them ready to capture gains if M&A activity picks up.

3. Cautious tweaks: Managing interest-rate-sensitive and federal-dependent risks

While some managers are adding positions, others are carefully trimming in areas where they see potential headwinds. Core managers are keeping a close eye on interest-rate-sensitive sectors, like housing, and are adjusting exposures as inflation and interest rate uncertainties linger. Value managers are similarly cautious with utilities and energy holdings that could face valuation challenges if rates climb. For these managers, it’s about reducing downside risk while keeping an eye on fundamentals.

Another area under watch is sectors dependent on federal spending. Given the potential for a shift in budget priorities, sectors like clean energy and specific consumer areas could face funding changes. Value managers, in particular, are treading carefully here, pausing major moves until policy priorities become clearer. Growth managers are becoming more selective, monitoring how tariffs or supply chain shifts could impact sectors like consumer goods or technology, especially those with international exposure.

The bottom line

As we check in on small-cap managers’ responses to the election, the strategies reflect a mix of optimism and caution. Managers across styles are positioning to ride the rally where they see strength, selectively adding in sectors where M&A or regulatory shifts could provide gains, and adjusting to mitigate risks in areas with potential headwinds. Whether it’s leaning into cyclicals, preparing for M&A, or cautiously managing rate-sensitive sectors, small-cap managers are keeping a balanced approach, ready to pivot as the new administration’s policies come into focus.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.