Small-Cap Stocks Can Outperform Large-Cap Peers in 2025: 5 Top Picks

Market Performance - U.S. stock markets experienced significant rallies in 2023 and 2024, with the S&P 500 rising 24.2% in 2023 and 23.3% in 2024. The Dow and Nasdaq Composite also saw increases of 12.9% and 28.6% respectively in 2024, following gains of 13.7% and 43.4% in 2023 [1][2]. Sector Analysis - The technology sector, particularly generative AI-centric stocks, largely drove the market rally over the past two years, while small-cap stocks showed relatively subdued performance, as indicated by the Russell 2000 index, which rose 12.9% in 2023 and 10% in 2024 [2]. Investment Recommendations - Due to the overstretched valuations of large-cap stocks, there is a potential shift in market preference towards small-cap stocks. Recommendations include five small-cap stocks with favorable Zacks Rank and strong growth potential for 2025: Travelzoo (TZOO), EverQuote Inc. (EVER), Lindblad Expeditions Holdings Inc. (LIND), Rigel Pharmaceuticals Inc. (RIGL), and Graham Corp. (GHM) [3][10]. Small Business Environment - Small businesses have faced significant challenges since the COVID-19 pandemic, including demand issues and supply chain disruptions. The implementation of tariffs on foreign products aims to strengthen U.S. industries and support small businesses by making imported goods more expensive [4][5][6]. Economic Indicators - The Federal Reserve's reduction of the benchmark interest rate by 1% in 2024 to a range of 4.25-4.5% is expected to benefit small businesses, which typically rely on affordable credit. The Fed has indicated potential further rate cuts in 2025 [8]. Small Business Optimism - The National Federation of Independent Business (NFIB) small business optimization index reached 101.7 in November, surpassing the 50-year average of 98 for the first time in 34 months [9]. Company-Specific Insights - Travelzoo (TZOO): Expected revenue and earnings growth rates of 14.6% and 10.8% for 2025, with a price target indicating a maximum upside of 73.4% [12][13]. - EverQuote Inc. (EVER): Anticipated revenue and earnings growth rates of 18.8% and 10.7% for 2025, with a price target suggesting a maximum upside of 100.7% [14][15]. - Lindblad Expeditions Holdings Inc. (LIND): Expected revenue and earnings growth rates of 10.2% and 93.1% for 2025, with a price target indicating a maximum upside of 53.2% [16][18]. - Rigel Pharmaceuticals Inc. (RIGL): Projected revenue and earnings growth rates of 14.7% and over 100% for 2025, with a price target suggesting a maximum upside of 250.8% [19][21]. - Graham Corp. (GHM): Expected revenue and earnings growth rates of 11.9% and over 100% for the current year, with a price target indicating a maximum upside of 20.4% [22][23][24].