Jefferies cuts 2026 small-cap earnings growth forecast to 11.5%

Investing.com -- Jefferies lowered its 2026 earnings growth expectations for small and mid-cap stocks to 11.5% from 13.5%, citing the impact of higher oil and gasoline prices amid the ongoing war in Iran.

The firm noted that analysts have not yet meaningfully reduced their forecasts, with Street estimates at 12% for small-cap, approximately 13% for mid-cap, and 16% for large-cap stocks. The upward movement in large-cap estimates was attributed mainly to the X-Sweet 16.

Jefferies adjusted its earnings outlook by giving equal weight to two factors: the 13.7% average earnings growth when GDP exceeds 2%, which remains the firm's economics team view, and the 9.3% earnings growth observed when both oil and gasoline prices rise year-over-year.

Despite the reduction, the 11.5% growth forecast remains above the long-term average of approximately 8%. The firm reported that the 3-month rolling earnings and sales revision ratios have stayed above 1.0 for the past seven months, marking the longest streak since the end of Covid.

Jefferies made several sector changes to its strategy. The firm moved to overweight positions in Financials, Health Care, and Discretionary sectors. Industrials were downgraded to market weight from overweight due to elevated sentiment, performance, and valuations. Staples were upgraded to market weight from underweight.

The firm noted that small-cap stocks have held up relatively well despite increased volatility, though quality stocks have not outperformed as expected. Jefferies maintained its preference for small-cap over large-cap, value over growth, and cyclical and quality stocks.