So far, the upswing on the stock market has only been driven by relatively few stocks. Small caps are lagging behind massively. One decisive reason for this are the massive increases in interest rates since mid-2022. But now the interest rate turnaround is coming. This should particularly benefit small caps.

2024 will be a year of interest rate cuts. Between March 2022 and July 2023, the key interest rate in the US was raised by 5.25 percentage points – in just 16 months. This historic series of interest rate increases is over. Fed Chairman Jerome Powell has announced three interest rate cuts for 2024. On average, the US monetary authorities expect the key interest rate to fall by 0.75 percentage points over the course of the coming year.

Falling interest rates are positive for the stock market in two ways. On the one hand, because the financing costs of companies decrease and future profits (discounted) are worth more. On the other hand, because investors‘ risk appetite increases – and with it the interest in small caps. This can already be observed currently.

In the long term, small caps clearly have the upper hand. 2024 will be a year of interest rate cuts and could bring a comeback for small caps. Since the start of the Ukraine war, they have been significantly lagging behind. Currently, the MDAX is 23% lower than at the end of 2021. The DAX, on the other hand, has gained just over 5% in these two years.

After this unusually long period of underperformance, a strong catch-up race for the „small ones“ is overdue. In the long term, the MDAX shows the DAX its taillights. In the ten years from 2012 to the end of 2021, the midcap index improved by almost 300%, while the DAX only improved by around 170%.

Uncertainty factor politics. Given the extremely cheap valuations compared to blue chips, there are currently high profit opportunities for small caps. It should only be a matter of time before the catch-up race begins. However, one uncertainty factor remains the disastrous economic policies of the traffic light coalition government, which is making life difficult for medium-sized companies that are more focused on the domestic market.

As far as technical analysis is concerned, the traffic lights are currently still on yellow. The MDAX crossed the 200-day moving average before the end of the year, but is currently only marginally above the moving average that indicates the medium-term trend. This is currently at around 26,860 points. Above 27,400 points, the chances for a sustainable trend movement increase.