JEF SMID-Cap Strategy—Conference Call Today @ 11AM: Q2 & 1st Half Recap

Research evidence excerpt

JEF SMID-Cap Strategy—Conference Call Today @ 11AM: Q2 & 1st Half Recap

Mid year refresh to our target & earnings forecast:

o We move our Russell 2000 target to 3190 from 2825, ~6% upside from the current level:

o Fed hiking rates is not always the “Death Knell” for Small Caps. In fact, 6-months prior to the Fed raising rates, the size

segment has averaged a gain of over 10%.

o The new Russell 2000’s P/E with fall to 21.9x from 26.0x and our absolute valuation model slipped two rungs, However,

still in Quintile 5 (most expensive) on an absolute basis.

o Our relative model vs. Large falls to the 21st percentile, but still in Quintile 2.

o When earnings are better than average, 2nd half performance is better than average at 6.5%.

o We look for the US GDP to rise in the 2nd half of the year, and this too means stronger performance.

o Mid-term elections adds risk, so below average performance, while a broader equity market has been good.

o Bumping up our 2026 earnings forecast to 15.7%, as profits have been resilient:

o We have been very pleasantly surprised by the strength in earnings and the trend in revisions for Small Caps. We used

two methodologies to update our 2026 forecast.

o First, earnings cuts in the 2nd half of the year tend to be much smaller than in the first half. We take consensus growth

rate and trim by average monthly change in the last 6 months of the year to reach 10.8%. Earnings beats have averaged

~600bps annually; Adding the beats back, we reach earnings growth of 16.8%.

o Our second test looked at earnings growth when GDP was above 2.5% and accelerating, which brings us to 14.6%.

o Taking the average of both forecasts, we reach earnings growth of 15.7%, best since ’21, and above average.